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Optional form for the registration of securities to be sold to the public by small business issuers

SB-2

April 29, 1999

As filed with the Securities and Exchange Commission on April 30, 1999.
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FRONTLINE COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 7379 13-3950283
(state or other (Primary standard industrial (IRS employer
jurisdiction of classification number) identification
incorporation number)
or organization)
One Blue Hill Plaza, 6th Floor
Pearl River, New York 10965
(914) 623-8553
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------
Stephen J. Cole-Hatchard, Chief Executive Officer
Frontline Communications Corporation
One Blue Hill Plaza, 6th Floor
Pearl River, New York 10965
(914) 623-8553
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
Copies to:
Robert J. Mittman, Esq.
Tenzer Greenblatt LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Telephone No. (212) 885-5000
Telecopier No. (212) 885-5001
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.|X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|

(1) Estimated solely for the purpose of calculating the registration fee based
on the exercise price of outstanding warrants and the closing price of the
common stock on Nasdaq on April 23, 1999.
(2) Under Rule 416, there are also being registered additional shares of common
stock as may become issuable pursuant to the anti-dilution provisions of
the plan.
(3) Under Rule 416, includes up to 180,518 additional shares of common stock as
may become issuable pursuant to anti-dilution provisions of the shares and
warrants.
Pursuant to Rule 429 under the Securities Act of 1933, this Registration
Statement relates to the Registration Statement on Form SB-2 (File No.
333-34115), as amended.
* Filing fees of $2,605.44 and $685.34 were previously paid with respect to the
1,840,000 shares issuable upon exercise of the warrants and the 320,000 shares
issuable upon exercise of the underwriter's warrants.
-----------------------
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to completion, dated April 30, 1999
3,140,518 Shares
Frontline Communications Corporation
Common Stock
This prospectus relates to 1,840,000 shares of common stock issuable upon
the exercise of warrants issued in connection with our initial public offering
in May 1998. Each public warrant entitles the holder to purchase one share of
common stock at a price of $4.80 at any time commencing May 13, 1999 until May
13, 2003. The warrants are redeemable by us at any time after June 13, 1999 upon
notice of not less than 30 days, at a price of $.10 per warrant, provided that
the closing bid quotation of our common stock on all 20 trading days ending on
the third trading day prior to the day on which we give notice has been at least
$7.20 and we obtain the written consent of the underwriter of our initial public
offering.
This prospectus also relates to an offering by selling stockholders of:
o 320,000 shares of common stock issuable upon the exercise of warrants
issued to the underwriter and its designees in connection with our
initial public offering;
o 500,000 shares of common stock issuable upon the exercise of options
granted under our 1997 stock option plan;
o 300,000 shares of common stock issuable upon the exercise of warrants
issued in a private placement in December 1997;
o 158,856 shares of common stock issued in a private placement in March
1999; and
o 21,662 shares of common stock issuable upon exercise of warrants
issued in a private placement in March 1999.
An additional 180,518 shares may be issuable under repricing rights and
anti-dilution provisions of the shares and warrants issued in the private
placement in March 1999.
We will not receive any of the proceeds from shares sold by selling
stockholders.
Our common stock is listed for trading on the Nasdaq SmallCap Market under
the symbol FCCN. On April 23, 1999, the last reported sale price of our common
stock on Nasdaq was $12.6875.
-------------------------------
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
---------------------------------
This prospectus is dated _____ __, 1999

PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including our
financial statements and related notes, and especially the risks described under
"Risk Factors."
The Company
Our Business
We are an Internet service provider offering Internet access to individual
and small business subscribers located in our target markets in the Northeast
United States. We provide subscribers with direct access to a wide range of
Internet applications and resources, including electronic mail, web site hosting
and design, dedicated circuits, e-commerce solutions, access to world wide web
sites and regional and local information and data services.
Since our initial public offering in May 1998, we have increased our
subscriber base from approximately 1,400 subscribers to approximately 15,000
subscribers. Our growth has been achieved primarily through acquisitions of the
customer bases of other Internet service providers. We are now focusing our
marketing efforts primarily on small business subscribers.
We also acquired WOWFactor, Inc., which provides e-commerce information and
services to women. Over 1.2 million women business owners are currently profiled
in WOWFactor's on-line directory. Our proposed WOWFactor web site is expected to
provide comprehensive e-commerce solutions, advanced business searches, on-line
requests for proposals and personal search services for women-owned businesses.
Our wholly owned subsidiary, CLEC Communications Corp. was granted
competitive local exchange carrier status by the New York State Public Service
Commission in December 1998. Our subsidiary will have the ability to subscribe
to and resell all forms of local telephone service in New York. Before our
subsidiary can provide such services, it must enter into an interconnection
agreement with a local exchange carrier.
We will seek to build our own network infrastructure, which we believe will
reduce our reliance on incumbent local exchange carriers. We believe that our
subsidiary's competitive local exchange carrier status, combined with the
efficiencies inherent in operating our own telecommunications network, should
benefit our customers by reducing costs and providing more predictable Internet
connections.
Our principal executive offices are located at One Blue Hill Plaza, Pearl
River, New York 10965, and our telephone number is (914) 623-8553. Our Internet
web site is located at www.fcc.net. WOWFactor's web site is located at
www.wowfactor.com.
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The Offering
Common stock offered ................... 3,140,518 shares.
Common stock outstanding ............... 3,388,700 shares.
Use of Proceeds ........................ Assuming that all of the public
warrants are exercised, we will
realize proceeds of $8,832,000.
Assuming the warrants held by
selling stockholders are exercised,
we will realize proceeds of
$1,799,997. Proceeds will be used
for working capital and potential
acquisitions. We will not receive
any of the proceeds from the sale
of common stock by the selling
stockholders.
Nasdaq SmallCap Market symbol .......... FCCN
Risk Factors ........................... You should read the "Risk Factors"
section beginning on page 5 and the
other cautionary statements in this
prospectus to ensure that you
understand the risks associated
with an investment in our common
stock.
Cautionary Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We intend
the forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy and our
plans are forward-looking statements. These statements can sometimes be
identified by our use of words such as "may," "anticipate," "expect," "intend,"
"believe," "estimate" or similar expressions. Our expectations in any
forward-looking statements may not turn out to be correct. Our actual results
could be materially different from our expectations. Important factors that
could cause our actual results to be materially different from our expectations
include those discussed under "Risk Factors." We have no obligation to update
these statements to reflect events and circumstances after the date of this
prospectus.
-3-

RISK FACTORS
The shares offered hereby involve a high degree of risk. Each prospective
investor should carefully consider the following risk factors before making an
investment decision.
We have a history of losses and anticipate that we will continue to incur losses
in the future.
Since our inception we have incurred significant losses. For the years
ended December 31, 1997 and 1998 our net losses were $2,037,417 and $1,744,099.
We had an accumulated deficit of $3,843,647 as of December 31, 1998. We expect
that our losses will continue as we incur increased operating costs associated
with expanding our subscriber base, establishing additional points-of-presence
and expanding our product offerings to include e-commerce and web site design.
We may not be able to achieve profitability or, if achieved, maintain
profitability for any extended period of time.
As an early stage company, we have a limited operating history upon which you
can make an investment decision.
We were organized in February 1997 and are in an early stage of
development. Accordingly, we have a limited operating history upon which you can
evaluate our performance and future prospects. In considering our prospects, you
should realize that, as a new business in a rapidly evolving industry, we may
encounter many expenses, delays, problems and difficulties which we lack the
experience to identify or quantify at this time.
In order to become profitable, we will need to implement our business plan
successfully, including by attracting new subscribers to our Internet access
services and increasing the number and efficiency of our points-of-presence.
The success of our plan of operation depends upon our ability to attract
and retain significant numbers of subscribers, consolidate our
points-of-presence and establish and equip additional points-of-presence on a
timely and cost effective basis. At the same time, we will need to hire and
retain skilled management, technical, marketing and other personnel and expand
our product and service offerings. We have limited experience in commercializing
new Internet products and services. In addition, there is limited information
available concerning the potential performance or market acceptance of our
points-of-presence or other services. We may not be able to implement our
business plan successfully, and we may also encounter unanticipated expenses,
problems or technical difficulties which could materially delay the
implementation of our business plan.
We plan to change our marketing focus and to offer additional products and
services, both of which will place a significant strain on us.
Historically, we have marketed our Internet services to individual
subscribers and the majority of our revenues to date have been generated through
individual subscriptions. In electing to expand our target market, we have
decided to market our services aggressively to small businesses. We are also in
the process of increasing our product offerings. In addition to providing
Internet access services, we plan to offer small businesses e-commerce
solutions, including commerce-enabled Web sites, document security services and
Internet payment services. We also intend to become a reseller of
telecommunications services in the near future.
The expansion of our target markets and product offerings will place
significant demands on the time and attention of our senior management and will
involve significant financial and other costs,
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including building necessary network infrastructures, marketing and promoting
our new products and services and hiring personnel to provide these new
services. We may not be able to enter new markets and offer new services
successfully, and we may not be able to undertake these activities while
maintaining sufficient levels of customer service to retain our existing
subscribers. Any increase in subscriber attrition rate as a result of our shift
in business emphasis would have a material adverse effect on us, our reputation
and our operations.
We are pursuing a strategy of rapid growth through acquisitions, which may
strain our operations and which we may not be able to manage effectively.
We are pursuing aggressive and rapid growth through the acquisitions of
other Internet service providers and companies involved in related
Internet-based businesses such as web site design and e-commerce. Our rapid
growth has in the past placed, and may continue to place, a significant strain
on our business resources. Our growth strategy will create significant demands
on the time and attention of our senior management and will involve significant
financial and other costs, including identifying and investigating acquisition
candidates, negotiating acquisition agreements and integrating the acquired
businesses with our existing operations.
Future acquisitions and the hiring of necessary additional personnel will
result in higher capital expenditures and operating expenses for us. Employees
and customers of acquired businesses may terminate their relationships with
these businesses after we acquire them. We may not be able to successfully
consummate any attempted acquisitions or integrate any acquired businesses into
our operations.
Our ability to manage our planned future growth through acquisitions will
depend upon our success in:
o hiring and retaining qualified management, technical and marketing
personnel;
o effectively maintaining high levels of customer service required to
retain subscribers while undertaking expansion; and
o expanding our network infrastructure capacity to service a growing
subscriber base.
If we fail to achieve any of these factors, our business, financial
condition, results of operations and the market price of our securities could be
materially adversely affected.
We will require a significant amount of capital to carry out our business plan
and may need to seek additional financing soon.
Implementing our current business plan will require significant capital. In
the past, we have relied on the issuance of equity securities and borrowings to
finance our operations. Based upon certain assumptions related to our business
plan and operations, we anticipate that our available capital, together with our
projected revenues, will satisfy our anticipated cash requirements through at
least the end of 1999. However, our available capital may not be sufficient to
permit us to implement our business plan, and our assumptions relating to our
business plan may prove to be flawed. If our business plan changes or if our
assumptions prove to be inaccurate, we may be forced either to seek additional
financing sooner than we currently anticipate or to curtail our expansion
activities. Sources of financing may not be available to us on commercially
reasonable terms or at all, either of which could have a material adverse effect
on our business plan and proposed expansion.
-6-

We have no experience consolidating our points-of-presence and cannot predict
the effects of consolidation on our operations.
We currently operate eleven points-of-presence, which are located in New
York, New Jersey and Pennsylvania. In an attempt to reduce operating costs and
take advantage of economies of scale, we have decided to consolidate our
existing points-of-presence into three SuperPOPs which will be located in New
York, New Jersey and Pennsylvania and which will cover broader geographic areas.
The process of consolidating our points-of-presence will be lengthy and
will require network installations to complete. We may not be able to
consolidate our points-of-presence successfully. The consolidation process may
also encounter unforeseen delays and costs. Events such as failure to obtain and
install telephone lines and network equipment on a timely and cost-effective
basis could materially delay our consolidation plans. Even if we are able to
consolidate our points-of-presence, we may not realize savings in operating
expenses. We have limited operating experience and have limited financial and
other resources to rely on if our initial consolidation efforts fail.
The results achieved to date by our points-of-presence may not be
indicative of the prospects or market acceptance of three larger SuperPOPs
serving wider and more geographically dispersed areas. Our points-of-presence
are located in the Northeastern United States, making it difficult to predict
market reaction to our services outside of the Northeast. In addition, SuperPOPs
may not be able to provide the same service to subscribers as our existing
points-of-presence. Any disruption to our services and any problems encountered
by subscribers as a result of the consolidation could result in increased
subscriber attrition, damage our reputation and materially adversely affect our
operations and revenues.
We do not have contracts with the supplier that we rely on for our access to
telecommunications networks or with the manufacturers of our hardware
components.
We depend on one supplier to provide us with Internet access through leased
telecommunications lines, but we have not entered into an interconnect agreement
with this supplier. If this supplier increases the rates it charges us, it could
materially adversely affect our operating margins. If our relationship with this
supplier terminates or if we otherwise fail to obtain continuing access to
telecommunications networks on a cost-effective and continuous basis, we could
be required to significantly curtail or cease our operations. Our operations
require our points-of-presence and third-party telecommunications networks to
operate on a continuous basis. Any service interruptions or equipment failures
with our points-of-presence or third-party telecommunications networks would
diminish subscriber confidence and adversely affect our business operations and
reputation.
We also depend on third-party manufacturers of hardware components. We
acquire certain components that we use in providing networking services from
only one source, including high performance routers manufactured by Cisco
Systems, Inc. and remote access servers manufactured by U.S. Robotics, Inc. We
have not entered into agreements with any equipment manufacturer, and we
purchase equipment components pursuant to purchase orders placed from time to
time in the ordinary course of business. If these or other manufacturers fail to
deliver quality products to us on a timely basis, if we are not able to develop
alternative manufacturing sources when we need them, or if we experience other
delays in receiving components, our business would be materially adversely
affected, and our ability to expand our operations would be limited.
-7-

The Internet services industry is relatively new and evolving, and any
significant changes in it may adversely affect us.
The Internet connectivity services industry is rapidly evolving, with
frequent introductions of new services and products, and it is characterized by
a high rate of business failures. We cannot predict the rate at which the market
for our products and services will grow, how quickly consumer tastes may change
or whether new products will result in market saturation. The novelty of the
market for Internet access services may adversely affect our ability to retain
new subscribers, some of whom may be unfamiliar with the Internet and may be
likely to discontinue our services after an initial trial period. Any
significant decline in demand for Internet connectivity services, in the
computer industry generally or in particular target markets would have a
substantial adverse effect on our business and prospects.
Significant increases in subscriber attrition rates would adversely effect our
operating results.
Subscribers are permitted to discontinue our services without penalty for
any reason. From December 1997 through December 1999, the number of subscribers
for our services increased from 1,400 to approximately 15,000, which may result
in an increase in our subscriber attrition rate. A significant increase in the
subscriber attrition rate would have a material adverse effect on our operating
results.
Keeping pace with rapidly changing Internet technology may be time-consuming,
expensive or impossible for us.
The market for Internet access is characterized by rapidly changing
technology, evolving industry standards and frequent new software and service
introductions. Our business is also subject to fundamental changes in the way
Internet access services are delivered.
Currently, Internet services are accessed primarily by computers and are
delivered by telephone lines. If the Internet becomes widely accessible by
screen-based telephones, television or other consumer electronic devices, or if
customer requirements change the way Internet access is provided, we may have to
acquire or develop new technology or modify our existing technology to
accommodate these developments. Recent technological advances in Internet
services include data compression, full-motion video, and integration of video,
voice, data and graphics. Attempting to keep our services current with recent
technological advances may require substantial time and expense, and we may not
be able to adapt our Internet service business to alternate access devices and
conduits. We may not be able to identify new product and service opportunities
as they arise or develop or bring new products and services to market in a
timely manner. To the extent that high-speed Internet access is increasingly
delivered by large carriers and cable companies, our business could be
materially adversely effected.
We have limited experience in marketing our services and limited marketing and
customer support resources.
Our success depends to a significant degree on our ability to continually
replace subscribers who terminate our services and attract and retain new
subscribers. We have limited marketing experience and limited marketing,
customer support and other resources. Full-scale marketing of our services to
individuals and small businesses may require us to rely on third party
distribution channels, such as retail stores, catalogs, book publishers and
computer hardware and software vendors. We may not be able to develop or
maintain relationships with these parties. Our business plan will also require
us to expand our customer service and support capabilities in order to satisfy
increasing customer demands. We may not be able to successfully expand our
customer service or support capabilities, and our marketing efforts may not
result in initial or continued acceptance for our Internet access services.
-8-

We may not have the financial resources, technical expertise or marketing and
support capabilities to withstand intense competition in the Internet services
industry.
The market for Internet access services is intensely competitive, and we
expect that competition will intensify in the future. There are no substantial
barriers to entry, and this industry is characterized by rapidly increasing
numbers of new market entrants and new Internet products and services.
Our competitors include many large companies that have significantly
greater market presence and financial, technical, marketing and other resources
than we do, including international, national and regional commercial Internet
service providers; established online services companies that currently offer
Internet access; computer hardware and software and other technology companies;
national long distance carriers; and cable operators. New competitors, including
large computer hardware and software, media, cable and telecommunications
companies, have also increased their focus on the Internet access market. We
also compete with smaller Internet service providers in the Northeast that seek
to provide Internet access to individual and small business subscribers.
Increased competition has resulted and could continue to result in
significant price competition, which in turn could result in significant price
reductions. In addition, increased competition for new subscribers could result
in increased sales and marketing expenses and related subscriber acquisition
costs, which could materially adversely affect our operating results. We may not
be able to offset the effects of any such price reductions or increased expenses
through an increase in the number of our subscribers or higher revenue from
enhanced services. We may not have the financial resources, technical expertise
or marketing and support capabilities to compete successfully, and the software,
services or technologies developed by others may render our services or
technologies obsolete or less marketable.
Our operations require us to use significant resources in expanding and
protecting our network infrastructure and computer equipment.
Our operations depend upon the capacity, reliability and security of our
network infrastructure. We have limited network capacity and must continually
expand our network infrastructure to accommodate increasing numbers of users and
the range of information they may wish to access. Expanding our network
infrastructure will continue to demand significant financial, operational and
management resources, and we may not be able to expand our network
infrastructure to meet potential demand on a timely basis, at a commercially
reasonable cost, or at all.
The success of our operations also depends on our ability to protect our
computer equipment against damage from fire, power loss, telecommunications
failures and similar events. Our network infrastructure is vulnerable to
break-ins and similar disruptions from unauthorized tampering with our computer
systems. Computer viruses or problems caused by third parties could lead to
material interruptions, delays or interruptions in service to consumers.
We lack effective methods for protecting our proprietary information.
We have no registered copyrights or patents or patent applications pending.
We do not have any proprietary applications software. We rely on a combination
of copyright and trademark laws, trade secrets, software security measures,
license agreements and nondisclosure agreements to protect our proprietary
information. It may be possible for unauthorized third parties to copy aspects
of, or otherwise obtain and use, our proprietary information without
authorization. We employ confidentiality agreements with our employees and
license agreements with our customers, but these agreements may not provide
-9-

meaningful protection of our proprietary information in the event of any
unauthorized use or disclosure of such information.
Changes in regulations and legislation may increase our liability, our expenses
and competition for our services.
Recently enacted federal, state and local legislation aimed at limiting the
use of the Internet to transmit certain content and materials could result in
significant potential liability to Internet service providers for information
disseminated through their systems. The adoption or strict enforcement of these
or any other future laws or regulations could increase our cost of doing
business. The application of existing laws governing issues such as property
ownership, libel and personal privacy to the Internet is uncertain. Any new
legislation or regulation or the clarification of the application of existing
laws and regulations to the Internet could have an adverse effect on our
business and prospects. Changes in the regulatory environment relating to the
Internet connectivity industry, including regulatory changes which directly or
indirectly affect telecommunication costs, could increase the likelihood or
scope of competition from local and regional telephone companies or others.
If we are unable to attract and retain qualified management and other personnel,
our business and operations could suffer.
Our success depends on the personal efforts of our key personnel. The loss
of the services of these individuals could have a material adverse effect on our
business and prospects.
Our success also depends on our ability to hire and retain additional
qualified management, marketing, technical, financial and other personnel.
Competition for qualified personnel is intense, and we may not be able to hire
or retain additional qualified personnel.
We are effectively controlled by members of our management, whose interests may
not be aligned with yours.
Members of our management beneficially own a significant number of shares
of our common stock. Accordingly, such persons, acting together, are in a
position to control us, elect all of our directors, cause an increase in the
authorized capital or the dissolution, merger or sale of our assets, and
generally direct our affairs.
We could be delisted from the Nasdaq SmallCap Market.
If, at any time, we become unable to maintain the requirements for
continued listing on Nasdaq, our common stock will no longer be traded on Nasdaq
and trading in our common stock would thereafter be conducted in the non-Nasdaq
over-the-counter market. If the common stock were not listed on Nasdaq and the
trading price of the common stock were to fall below $5.00 per share, trading in
the common stock would become subject to the Security and Exchange Commission's
penny stock rules. The penny stock rules require additional disclosure by
broker-dealers in connection with any trades involving penny stock. The
additional burdens imposed upon broker-dealers by such requirements could, if
the common stock were deemed to be a penny stock, discourage broker-dealers from
effecting transactions in the common stock, which could severely limit the
market liquidity of the common stock and the ability of purchasers in this
offering to sell the common stock in the secondary market.
It is possible that Investors may not be able to exercise the public warrants.
-10-

The Company initially qualified the sale of the public warrants in a
limited number of states. We may be prevented from issuing common stock in
states other than those in which the warrants were initially qualified, upon the
exercise of public warrants unless an exemption from qualification is available
or unless the issuance of common stock upon exercise of the public warrants is
qualified. We may decide not to seek or may not be able to obtain qualification
of the issuance of such common stock in all of the states in which the holders
of the public warrants reside. In this case, the public warrants held by
purchasers will expire and have no value if such public warrants cannot be sold.
Further, a current prospectus covering the common stock issuable upon exercise
of the public warrants must be in effect before we may accept public warrant
exercises.
Certain of our suppliers may experience problems with the Year 2000.
We depend on third party telecommunications and hardware suppliers and upon
our access to and the uninterrupted operation of the Internet. Service
interruptions or supplier delays may result from year 2000 issues. Our business
would be materially adversely effected if there are any interruptions in service
resulting from an inability of such third-party systems to recognize the year
2000.
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USE OF PROCEEDS
Assuming that all of the public warrants are exercised, we will realize
proceeds of $8,832,000. Assuming the warrants held by selling stockholders are
exercised, we will realize proceeds of $1,799,997. We have agreed to pay certain
expenses in connection with this offering, currently expected to be
approximately $50,000. Proceeds will be used for working capital and potential
acquisitions. We will not receive any of the proceeds from the sale of common
stock by the selling stockholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the Nasdaq SmallCap Market under the
symbol "FCCN" since May 15, 1998. The following table shows the high and low
closing sales prices per share of our common stock as reported by Nasdaq for
each quarter since we have been public.
High Low
---- ---
Fiscal Year Ended December 31, 1998
Second Quarter (from May 15, 1998) .......... $5.250 $4.250
Third Quarter ............................... 8.125 2.125
Fourth Quarter .............................. 8.218 2.375
Fiscal Year Ended December 31, 1999
First Quarter ............................... 13.625 5.625
Second Quarter (through April 26, 1999) ..... 16.875 11.750
On April 23, 1999, the last reported price of our common stock on the
Nasdaq SmallCap Market was $12.6875 per share. At April 23, 1999, there were
approximately 55 holders of record of our common stock. We believe that we have
an excess of 400 beneficial owners of our common stock.
We have never declared or paid any dividends on our common stock, and we do
not expect to declare or pay any cash dividends in the foreseeable future. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon our earnings, if any, our capital
requirements and financial condition and other relevant factors.
-12-

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our revenues are derived primarily from providing Internet access services
to individual and business subscribers. Revenues are comprised principally of
recurring revenues from our customer base, non-recurring start-up fees for modem
and leased line connections and from various ancillary services. We charge
subscription fees, which are billed monthly or quarterly, in advance, typically
under pre-authorized credit card accounts or automatic bank transfers. We have
not yet generated any revenues from local exchange carrier or e-commerce
activities.
Monthly subscription service revenue is recognized over the period in which
services are provided. Service revenues derived from dedicated access services,
which require the installation and use of equipment we provide at a subscriber's
location, are recognized when the service is commenced. Fee revenues for
ancillary services are recognized as services are performed.
Our operating results may be significantly affected by subscriber attrition
rates. Subscribers may discontinue service without penalty at any time.
Significant subscriber attrition would have a material adverse effect on our
operating results.
Acceleration in the growth of our subscriber base or changes in usage
patterns among subscribers may increase operating costs. Acceleration in the
growth of the subscriber base could require us to hire additional personnel and
increase our expenses related to marketing, network infrastructure and customer
support sooner than anticipated. An increase in peak time usage or an overall
increase in usage by subscribers could adversely affect our ability to
consistently meet the demand for our access services. As a result, we may be
required to hire additional personnel and increase expenses related to network
infrastructure capacity with minimal corresponding increases in revenue on a per
subscriber basis.
Acquisitions
We expanded our operations through acquisitions, which has placed and may
continue to place a significant strain on our management, personnel,
administrative, operational, financial and other resources. To successfully
manage our growth, we will be required to continue to implement and improve our
information and operating systems, hire, train and manage an increasing number
of management and other personnel and monitor our operations.
WOWFactor, Inc.
In October 1998, we acquired all of the issued and outstanding capital
stock of WOWFactor, Inc., a company engaged in the business of promoting
e-commerce through its web sites primarily for women's businesses. We issued to
the stockholders of WOWFactor ten shares of newly created Series A Preferred
Stock, which are convertible on July 15, 1999 into common stock with a market
value of $1,000,000, subject to a maximum issuance of 250,000 shares of common
stock.
Roxy Systems, Inc. d/b/a Magic Carpet
In October 1998, we acquired substantially all of the assets used in the
business of Roxy Systems, Inc. d/b/a Magic Carpet in consideration of $75,000 in
cash and the assumption of approximately $60,000
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of liabilities. At the time of the acquisition, Magic Carpet was an Internet
service provider with approximately 1,000 subscribers in Orange County, New
York.
US Online, Inc.
In October 1998, we acquired assets used in the business of US Online,
Inc., including a point-of-presence the Philadelphia area, and assumed two of US
Online's executory contracts for $570,000 in cash. At the time of the
acquisition, US Online was engaged in the business of providing Internet access,
web hosting and leased communications lines to approximately 3,500 subscribers
in New York, New Jersey and Pennsylvania.
Webspan, Inc.
In December 1998, we acquired substantially all of the assets used in the
business of Webspan Communications, Inc. for $500,000 in cash, the assumption of
$544,000 in liabilities and 113,364 shares of our common stock. At the time of
the acquisition, Webspan was an Internet service provider with approximately
9,000 subscribers in New York and New Jersey.
The acquisitions resulted in our recording intangible assets of
approximately $3,215,000 during 1998 which are being amortized over a period of
three years. See Note 4 in the Consolidated Financial Statements.
Results of Operations
Comparison of the Years ended December 31, 1998 and 1997
Revenues: Revenues for the year ended December 31, 1998 were $574,964
compared to $321,706 for the year ended December 31, 1997. The increase was
attributable to an expanded subscriber base. We had approximately 15,000 and
1,400 subscribers at December 31, 1998 and 1997. The increase in subscriber base
was principally due to acquisitions.
Cost of Revenues: Cost of revenues for 1998 were $651,378 compared to
$251,928 for 1997. Cost of revenues as a percentage of revenues for 1998 was
113.3% compared to 78.3% for 1997. The increase in cost of revenues was due to
increased communication, depreciation and technical personnel expenses incurred
to support the increased subscriber base and in anticipation of future
subscriber growth. We expect these costs to increase in absolute dollars as
additional subscribers are added.
Operating Expenses: Operating expenses for 1998 were $1,744,029 compared to
$2,077,883 for 1997. Operating expenses for 1998 and 1997 included non-cash
compensation charges of $175,137 and $1,537,000. Excluding the non-cash charges,
operating expenses increased by $1,028,009 in 1998 compared to 1997. This
increase in operating expenses was attributable to higher advertising, payroll,
professional fees and rent expenses incurred in 1998 to support the increased
revenue base and in
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anticipation of future growth. Management anticipates future increases in
operating expenses related to advertising, rent payroll, depreciation and
professional fees.
Interest Income: Interest income net of interest expense for 1998 was
$76,344 compared to net interest expense of $28,421 for 1997. The increase in
interest income was due to investment of the proceeds of our initial public
offering.
Net Loss: We incurred significant losses and anticipate that we will
continue to incur losses until sufficient revenues are generated to offset the
substantial up-front expenditures and operating costs associated with attracting
and retaining additional subscribers. For the years ended December 31, 1998 and
1997, we incurred net losses of $1,744,099 and $2,037,417.
We have outstanding options to purchase 613,000 shares of common stock, net
of forteitures and exercises, under the stock option plan at exercise prices
ranging from $2.00 to $5.18 per share. The grant of 213,000 of the options are
subject to shareholder approval at our 1999 stockholder meeting. To the extent
the market value of our common stock subject to these options on the date of
such approval exceeds the exercise price approval of the option grants will
result in compensation expense equal to the amount of such excess.
Liquidity and Capital Resources
In May 1997, we completed a private placement in which we issued 200,000
shares of common stock and received proceeds of $400,000.
In December 1997, we completed a private placement in which we issued
$150,000 principal amount of promissory notes and warrants to purchase 300,000
shares of common stock at an exercise price of $5.00 per share. The notes were
repaid in May 1998.
In May 1998, we completed our initial public offering of our securities and
received net proceeds of approximately $5.8 million. Out of the proceeds,
$443,000 was used for repayment of indebtedness and $264,113 was used to
repurchase 231,520 shares of our common stock. We completed four acquisitions in
1998 and used approximately $1,482,000 for the cash portion of the purchase
price and related expenses. The remaining proceeds, after meeting our working
capital and capital expenditure requirements, are currently held in
interest-bearing bank accounts.
Our working capital at December 31, 1998 was $1,245,536 compared to a
working capital deficit of $423,369 at December 31, 1997. The increase in
working capital was due to receipt of the proceeds of our initial public
offering.
In March 1999, we sold 158,856 shares of our common stock to two investors
for $2,000,000. We also issued warrants to purchase 21,662 shares of common
stock at an exercise price of $13.849 per share. We agreed to include the shares
as well as the shares underlying the warrants in the registration statement of
which this prospectus forms a part and granted repricing rights with respect to
the shares, and anti-dilution rights with respect to the warrants, subject to an
aggregate maximum issuance of 450,000 shares. See "Description of Securities."
Our primary cash requirements are to fund acquisition of subscriber bases
and related Internet businesses, establish additional points-of-presence,
install network equipment, lease space for consolidated points-of-presence and
working capital. To date, we financed our cash requirements primarily through
issuance of debt and equity securities. We currently do not have any lines of
credit. The availability of cash sources is dependent upon prevailing market
conditions, interest rates and our financial condition. We will require
additional cash resources in connection with our continued expansion.
Our capital expenditures for 1999 are expected to be between $300,000 to
$400,000. In addition, we have issued orders to purchase communications
equipment and professional services in the amount of $2,000,000 from a major
telecommunications equipment manufacturer. The manufacturer would provide
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the necessary financing through a lease. The transaction is subject to the
negotiation and execution of a definitive agreement.
Year 2000
The Year 2000 problem involves the ability of computer hardware and
software systems to accurately recognize and process date sensitive information
when the year changes to 2000. Systems that cannot recognize dates in the year
2000 or thereafter could generate erroneous data or fail.
We have undertaken a two phase process to evaluate our internal status with
respect to the Year 2000 problem. Phase one involves assessing both computer
systems and non-computer systems which contain embedded technology for Year 2000
compliance. To date, we have not discovered Year 2000 issues in the course of
our assessment that would have a material adverse effect on our business,
results of operations or financial condition. Our phase one evaluation is an
ongoing process and we cannot assure you that we will not discover Year 2000
problems or that we failed to identify Year 2000 problems that could have a
material effect on our operations. Phase one has been conducted by our employees
and, to date, the costs and expenses associated with phase one have not been
material.
Phase two of our evaluation process will involve taking any needed
corrective actions to bring our systems into compliance and to develop a
contingency plan in the event any critical systems fail as a result of the Year
2000 problem. We will also attempt to quantify the impact on our business should
any critical systems fail. Although we cannot currently estimate the magnitude
of such impact, if systems material to our operations have not been made Year
2000 compliant by the end of the year, the Year 2000 problem could materially
adversely affect us. To date, the costs incurred with respect to phase two have
not been material. Future costs are difficult to estimate; however, we do not
currently anticipate that such costs will be material.
We have begun a survey of third-parties with which we transact business,
including critical vendors and financial institutions, for Year 2000 compliance.
We are in the process of evaluating the Year 2000 preparedness of our
telecommunications providers, on which we are reliant for the network services
crucial to web hosting and Internet connectivity services. We are actively
working to mitigate any potential impact by seeking to maintain diverse
providers for such network services. However, failure of any one provider may
have a material adverse effect on our operations.
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BUSINESS
Industry Overview
In recent years, the Internet has experienced a rapid increase in its
number of users. According to IntelliQuest Research, it is estimated that the
number of adults online in the United States is approximately 79.4 million, with
an additional 18.8 million people planning to go online in 1999. Forrester
Research estimated that the total goods traded over the web in the U.S. in 1997
reached $9 billion. In the year 2000, Forrester expects the total goods traded
to increase to $160 billion, and by year 2002, $327 billion.
We believe that the following key trends will contribute favorably to
expected continued popularity of the Internet:
o Increased Online Advertising and Shopping: Corporate spending on
online advertising has increased as the emerging demographics of Web
users have begun to mirror worldwide demographics. According to a
report by Simba Information, spending on online advertising will reach
$7.1 billion by 2002, as a significantly higher percentage of women
and middle-income users visit the Internet. Research from CnetNews.com
indicates that online buyers are spending more over time. In 1998,
thirty-five percent of online buyers spent more than $300 online. This
was an eleven percent increase from 1997.
o Increased Availability of user-friendly technology and support for
E-commerce: Internet use is promoted by the development of software
tools that simplify access to the Internet's applications and
resources. As users become more comfortable with the Internet and the
Internet increasingly becomes a medium for business transactions,
personal financial management, entertainment and personal
communication, we believe that demand by individuals for competitively
priced, direct, high speed access to commerce-enabled businesses,
updated information, personal home pages, interactive multimedia games
and entertainment will continue to grow.
o Continuing Penetration of Computers and Modems in the Home: An
increasing percentage of computer owners also own modems, which are
now pre-installed in a growing number of new computers. According to a
1997 survey by FIND/SVP's, more than 42.7 million households in the
United States own a personal computer; approximately 40 million also
own a modem; and 36.5 million households use the Internet.
o Growth of the Informational, Entertainment and Commercial Applications
of the Internet: Use of the Internet has grown rapidly since its
commercialization in the early 1990s. An increasing number of servers
and web sites are connected to the Internet, making available text,
graphics, audio and video information which may be accessed by
consumers. Through an Internet connection, users can access
commercial, educational and governmental databases, entertainment
software, photographs and videos, newspapers, magazines, library card
catalogs, industry newsletters, weather updates and other information.
Traditional and emerging Internet applications, including electronic
mail, the world wide web and usenet news groups are also increasing in
popularity.
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Our Strategy
Our strategy is to become a leading provider of Internet access and related
services to individuals and small businesses. We are concentrating our resources
on developing key elements of our business strategy in order to accomplish our
goal. We will seek to concurrently:
o develop our Internet service provider business and increase our
subscriber base;
o initiate and foster our e-commerce business; and
o expand and develop our network capabilities and the services that we
make available to our customers.
Development of the Internet Service Provider Business
Our core business is providing Internet access service to individual and
small business subscribers. We offer a range of services starting at a simple
$19.95 per month basic package that includes e-mail and Internet access, to
higher priced individualized service that may include web hosting, dedicated
circuits, and digital subscriber lines service. We intend to provide our
customers with a full range of Internet access services, including dial-up
access, web site hosting, dedicated connections and digital subscriber line
services. Digital subscriber line service provides customers with high-speed
access the Internet over conventional telephone lines rather than digital lines.
We currently have approximately 15,000 customers who subscribe for our
services. We will seek to increase the number of subscribers primarily through
referrals. Thus, we have made generating positive referrals and stimulating
subscriber growth and retention through high-quality customer service a focus of
our marketing efforts. We offer incentives to existing subscribers and
value-added resellers who refer our service to new customers. A subscriber who
refers a new dial-up customer to us will receive one free month of service for
each referral, provided that the new subscriber remains active for a minimum of
sixty days. Value added resellers receive a commission based on a percentage of
the value of any service contract that they refer to us. We will also seek to
expand our subscriber base by acquiring Internet service providers.
Development of E-commerce Business
We also intend to increase our services by offering small business owners
cost-effective, full-service e-commerce solutions which are easy to implement
and maintain. Available e-commerce solutions will include commerce-enabled web
sites, document security services, Internet payment services, digital coupons
and on-line merchandising technologies. To properly promote our services and
thereby potentially increase our subscriber base, we are expanding our sales and
marketing staff by seeking to recruit qualified staff and management.
In October 1998, we acquired WOWFactor, Inc., a company engaged in the
business of promoting e-commerce through its web site devoted to professional
women and women-owned businesses. WOWFactor has not yet launched its web site.
We anticipate three sources of revenue from the proposed WOWFactor web site:
o corporate sponsorships;
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o advertising, including banner advertisements, posting links to
affiliate partners and shared revenue from advertisements provided by
content partners; and
o providing web hosting and e-commerce enabling services to other sites.
Services to be provided through the WOWFactor Web site are expected to
include a unique service that allows the user to request a personal, limited
search of the businesses profiled in the WOWFactor directory. WOWFactor will
respond with listings from its database. WOWFactor will also offer users a
unique business reply card service that allows users to submit online requests
for proposals by completing a template on the site. Both services promote
WOWFactor's overriding goal: bringing buyers and sellers together on the
Internet.
Expansion and Development of Capabilities and Services
The Internet access and e-commerce business is rapidly developing, and we
recognize that if we do not keep pace with, or even ahead of, the advances in
the industry, we will fall behind the competition. We are continually looking
for new and innovative ways that we can offer better, more complete, more
efficient and less expensive service to its customers such as:
o Consolidating our points-of-presence for operational efficiency by
creating one SuperPOP in each of New York, New Jersey and
Pennsylvania. Points-of-presence permit subscribers to access the
Internet through a local telephone call. By consolidating our
points-of-presence, we hope to lower our monthly overhead by taking
advantage of economies of scale.
o Becoming a reseller of local telephone service. Through our
subsidiary, CLEC Communications Corp., we are authorized to subscribe
and resell all forms of local telephone service in the State of New
York. The provision of services requires us to enter into an
interconnection agreement with the incumbent local exchange carrier.
We intend to build our own network infrastructure, which may reduce
our reliance upon the infrastructures of the incumbent local exchange
carriers. By becoming a competitive local exchange carrier, we intend
to directly provide certain services directly which we currently
provide indirectly through partnerships and contracts with third
parties, such as digital subscriber line service.
Internet Services
We provide a variety of competitively priced Internet access services,
including dial-up accounts and dedicated access.
o Dial-Up Accounts: We believe that dial-up accounts present an
attractive opportunity for growth. Dial-up subscribers access the
Internet through a telephone call to one of our points-of-presence. A
user can quickly activate an account with us, obtain two Internet
e-mail addresses, web space and establish automatic billing to the
user's credit card. Subscriber accounts are priced from $19.95 per
month for unlimited connections, $48 per month for an unlimited
integrated services digital network (ISDN) use account and $6.95 per
month for limited use customers. There is no connection fee.
Connections for ISDN services require the customer to obtain an ISDN
line from the local telephone company. Our network supports
connectivity software which utilizes standard communication
-20-

protocols, which enable a user's computer to communicate with other
computers over the Internet.
o Dedicated Access: We also offer high speed, high bandwidth dedicated
leased lines principally for business users who desire to connect
their internal computer networks to the Internet, 24 hours a day,
seven days a week. Our leased line accounts to provide Internet
services to businesses at various speeds, including 56K circuits,
fractional T-1 and full T-1 lines, depending on the customer's needs.
We provide our customers with dedicated leased lines and bills
subscribers on a monthly basis through a consolidated bill which
includes the phone company's charges.
Our product offerings to subscribers also include:
o Web Design and Hosting Services: We offer web site hosting services
for a 24-hour interactive presence on the Internet. Our web servers
connect directly to the Internet via high speed T-1 lines providing
maximum bandwidth. This service includes domain name registration,
24-hour access, file upload and/or download capability and statistical
logs. We also offer web page design and development services and will
seek to expand the scope of such services in the future.
o Co-Location Space: We provide a physical location at within our
facilities for customers to install equipment and connect directly to
the Internet. This service provides customers with a low cost direct
connection to our router. We provide this service under maintenance
agreements with pricing determined by the amount of space occupied and
bandwidth needed.
Network Infrastructure
As of December 31, 1998, we offered Internet access service through
points-of-presence located in four states. Users located within local dialing
range of the our points-of-presence connect to the points-of-presence through
telephone lines provided by the local telephone company. Each of our
points-of-presence generally connects to the Internet directly or through our
main hub in New York City.
The number and location of our points-of-presence depends upon subscriber
demand, relative costs of telecommunications facilities, and the availability of
other competitive local exchange carriers. We are continuously evaluating the
usage and traffic at each of our points-of-presence in order to optimize network
traffic and Internet access times.
Our network hub in New York City is connected to the Internet through data
communications lines leased from Internet backbone providers that carry data
traffic for us and other subscribers and deliver it either to its end
destination, if that destination is connected directly to their networks, or to
the Internet gateway points where the traffic is routed onward to its ultimate
destination. As we grow, we will need to increase the bandwidth of our
connection to the rest of the Internet. This may be done through increasing the
bandwidth of our connections through current providers, by adding new
connections through other providers or by establishing leased line connections
directly to the Internet gateway points.
We maintain a network management center at our Pearl River, New York
headquarters through which our technical staff monitors network traffic, service
quality and security, as well as equipment at
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our points-of-presence, to ensure reliable Internet access. The network
management center is monitored 24 hours a day, 7 days a week. In addition, we
are continuing to invest in improved network monitoring software and hardware
systems.
Marketing and Sales
Although we continue to provide Internet service to a growing number of
individual subscribers, our primary focus has shifted to providing Internet
service to small businesses in the northeastern United States. We currently
obtain new individual subscribers by (1) responding to inbound calls and e-mails
which are largely generated from referrals from existing subscribers and (2)
acquisitions of other Internet service providers. We are continuing our
marketing programs that target retention and referrals that are associated with
our current base of dial-up customers.
The primary methods planned for targeting new small business customers
include direct response marketing programs such as radio, outbound
telemarketing, online marketing and broadcast fax. Affinity marketing programs,
such as those with affiliates such as online book and record sellers, will also
be employed. In a highly competitive industry such as this one, we believe that
name recognition is essential. Our marketing personnel are actively working to
achieve name recognition through radio, trade and local business print media
advertising and local event marketing. We believe that this will also aid in the
development of a quality, value-added reseller and affiliate channel.
We are transitioning our marketing position to be the Internet service
provider for small businesses. We have adopted the slogan Effortless E-commerce
& Internet Access. This slogan is intended to communicate our focus to potential
small business customers.
We currently have an in-house sales staff consisting of an Executive Vice
President of Marketing and Sales, a Director of Business Development, a Sales
Manager, and inbound sales representatives. We plan to outsource outbound
telemarketing.
Our investment in WOWFactor is an initial step in our efforts to reach
small businesses. WOWFactor, with its focus on women business owners nationally,
is believed to be a potential distribution channel for our services.
Customer Support
Providing prompt and effective technical assistance to our subscribers and
customers is essential for retention of our customers, cost containment and
quality improvement efforts. We provide network monitoring and emergency
subscriber assistance services 24 hours a day, seven days a week. Regular
support and technical assistance is available 16 hours per day, 7 days per week.
We plan to implement 24-hour technical support during 1999. In house technical
personnel respond to telephone and e-mail inquiries. All customer service is
handled in-house in order to maintain the support levels required to retain
customers in a competitive market.
Competition
The market for Internet access services is highly competitive. There are no
substantial barriers to entry, and we expect that competition will intensify in
the future. Our ability to compete successfully is significantly affected by
numerous factors, including price, ease of use, reliability, customer support,
geographic coverage and industry and general economic trends, particularly
unfavorable economic conditions adversely affecting consumer discretionary
spending. Our competitors include many large
-22-

companies that have substantially greater market presence and financial,
technical, marketing and other resources than we do, including
o international, national and regional commercial Internet service
providers, such as Performance Systems International, Inc.;
o established on-line services companies that currently offer Internet
access, such as America Online, Inc.;
o computer hardware and software and other technology companies, such as
IBM and Microsoft Corp.;
o national long distance carriers, such as AT&T; Corp., MCI
Communications Corp. and Sprint Corp.;
o regional telephone companies; and
o cable operators, such as TeleCommunications, Inc.
We also compete with smaller Internet service providers in the northeastern
regional area that also focus on providing Internet access to individual
subscribers and smaller businesses. These smaller Internet service providers are
competing with us for the same market share. Such companies include SimLab
Network, SageNetworks, RCN Network, and Verio Network.
Our entry into the e-commerce market through our anticipated launch of the
WOWFactor site will expose us to additional competitors. WOWFactor plans to
enter a market that is also targeted by iVillage, Oxygen Media,
womencentral.com, womenowned.com, women.com and herspace.com.
Employees
As of March 1, 1999, we had 40 employees in addition to our 6 executive
officers. Of such employees, 20 are engaged in customer support, 4 are engaged
in sales and marketing, 1 in business development, 5 in accounting and finance,
1 in legal and 9 in administration. We engage part-time employees from time to
time. None of our employees is represented by a union. We consider our employee
relations to be good.
Properties
Our executive offices are located in Pearl River, New York, where we lease
approximately 5,525 square feet under a lease that expires in June 2002. The
annual rental ranges from approximately $100,000 to $110,000 through the lease
term. We also lease space, typically less than 100 square feet in various
geographic locations to house the telecommunications equipment for each of our
points-of-presence. Leased facilities for points-of-presence have various
expiration dates through May 2002. Aggregate annual rentals for
points-of-presence are approximately $17,000.
-23-

Stephen J. Cole-Hatchard has been our Chairman, Chief Executive Officer and
President since August 1997. Mr. Cole-Hatchard was our Vice President of Finance
from February 1997 to August 1997 and has been one of our directors since
February 1997. Prior to joining us, Mr. Cole-Hatchard was Chief Financial
Officer for Hudson Technologies, Inc. from 1993 to 1997. A 1989 cum laude
graduate of Pace Law School, Mr. Cole-Hatchard is a member of the bar of the
State of New York.
Nicko Feinberg has been one of our directors and our Vice President of
Technology since November 1996 and our Chief Information Officer since August
1997. From April 1994 to October 1996, Mr. Feinberg was a Sales Manager and,
from April 1991 to April 1994, a Sales Account Executive for Microage Computer
Outlet, Inc., a company engaged in computer sales and training.
Michael Olbermann has been our Chief Operating Officer since September 1997
and one of our directors since February 1997. Mr. Olbermann was also our Vice
President of Business Development from February 1997 until September 1997. Mr.
Olbermann has owned and operated Rock House Construction Co., Inc., a company
engaged in commercial and residential construction, since 1986.
Vasan Thatham has been our Vice President and Chief Financial Officer since
February 1999. Prior to joining us, from 1994 through 1998, Mr. Thatham was Vice
President and Chief Financial Officer of Esquire Communications Ltd., a company
engaged in providing legal support services. From 1987 to 1993, Mr. Thatham was
comptroller and ultimately Chief Financial Officer of Strings Ltd., a specialty
retail chain. From 1978 to 1987, Mr. Thatham held various positions with Ernst &
Young in Kuwait and KMPG Peat Marwick in India. Mr. Thatham is a chartered
accountant under the laws of India.
Amy Wagner-Mele has been our Vice President, Secretary and Corporate
Counsel since September 1998, and was recently promoted to Executive Vice
President and General Counsel. Prior to joining us, Ms. Wagner-Mele was an
associate with the New York office of Winston & Strawn, an international
-24-

Corporate/litigation firm, where she litigated securities actions, contract
disputes and appellate matters. From 1993 to 1997, Ms. Wagner-Mele was an
associate with Podvey, Sachs, Meanor, Catenacci, Hildner & Cocoziello, P.C. in
Newark, New Jersey. Ms. Wagner-Mele received her Juris Doctor from the New York
University School of Law in 1993. She received her bachelor's degree, magna cum
laude, from the University of Delaware in 1990. She is admitted to the New York
and New Jersey bars.
Margaret McGillin has been our Vice President of Marketing and Sales since
October 1998 and was recently promoted to Executive Vice President of Marketing
and Sales. She is also President of WOWFactor. Ms. McGillin earned her MBA from
The Leonard N. Stern School of Business at New York University and a bachelor's
degree from Northeastern University with degrees in marketing, finance and
international business. During her 15 year career, Ms. McGillin has served as
Account Director for Modem Media, and as District Product Manager for AT&T;,
before founding WOWFactor, Inc. in 1995. Ms. McGillin is an active lecturer and
panelist on issues concerning women in marketing and technology. Her memberships
include: Women in New Media, Women, Inc., The National Association of Female
Executives, The National Association of Women Business Owners, George Dean's
50/50 by 2000, and the New York New Media Association.
Ronald C. Signore has been one of our directors since December 1997. Mr.
Signore, a Certified Public Accountant licensed in New York and New Jersey, has
been a partner in the accounting firm of Robert Gray & Co., LLP for more than
the past five years.
Ronald Shapss has been one of our directors since December 1997. Mr. Shapss
is the founder of Ronald Shapss Corporate Services, Inc., a company engaged in
consolidating fragmented industries since 1992. Ronald Shapss Corporate Services
was instrumental in facilitating the roll-up of several companies into such
entities as U.S. Delivery, Inc., Consolidated Delivery & Logistics, Inc. and
Corestaff, Inc. Mr. Shapss was also the founder of Coach USA, Inc. and is
presently on the advisory boards of Consolidated Partners Founding Fund, L.L.C.,
and 1+ USA, Inc., which founded Advanced Communications Group, Inc., a
competitive local exchange carrier which trades on the New York Stock Exchange.
A 1970 graduate of Brooklyn Law School, Mr. Shapss is a member of the New York
bar.
All directors hold office until the next annual meeting of stockholders for
the ensuing year or until their successors have been duly elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. We established an Audit Committee of the Board of
Directors consisting of Messrs. Signore and Shapss.
-25-

EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid during the fiscal
years ended December 31, 1997 and 1998 to our Chief Executive Officer. We refer
to the executive officer below as our "Named Executive." No other officer
received more than $100,000 during the year ended December 31, 1998.
Summary Compensation Table

- ----------
* Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end market
value of the common stock, which was $6.719 on December 31, 1998.
-26-

Director Compensation
We do not currently pay our employee directors any fees for attending Board
meetings. We pay our non-employee directors $3,000 per annum for attending Board
Meetings.
In December 1997, we entered into a consulting agreement with Mr. Shapss
which provides for Mr. Shapss to assist us with mergers and acquisitions. In
consideration of such services, we issued to Mr. Shapss 100,000 shares of common
stock and non-plan options to purchase 80,000 shares of common stock at an
exercise price of $2.00 per share. We also agreed to pay to Mr. Shapss $2,000
per month through May 1999.
Employment Agreements
We have entered into three-year employment agreements with each of Messrs.
Feinberg, Cole-Hatchard and Olbermann which provide for an annual base
compensation of not less than $88,000, $45,000 and $88,000 and such bonuses as
the Board of Directors may, in its sole discretion, from time to time determine.
We have also entered into a three-year employment agreement with Margaret
M. McGillin pursuant to which Ms. McGillin agreed to serve as Executive Vice
President of Sales at a salary of $82,000 per annum, for year one, and not less
than $98,000 per annum for year two and thereafter.
We have also entered into a three-year employment agreement with Amy
Wagner-Mele pursuant to which Ms. Wagner-Mele agreed to serve as Corporate
Counsel at a salary of not less than $98,000 per annum.
The employment agreements provide for employment on a full-time basis and
contain a provision that the employee will not compete or engage in a business
competitive with the current or anticipated business of our company during the
term of the employment agreement and for a period of two years thereafter.
Stock Option Plan
In February 1997, our Board of Directors and stockholders adopted the 1997
stock option plan under which 500,000 shares of common stock are reserved for
issuance upon exercise of options. The Stock option plan is designed to serve as
an incentive for attracting and retaining qualified and competent employees,
directors and consultants.
Our Board of Directors, or a committee thereof, administers the stock
option plan and is authorized to grant options to all of our eligible employees,
including officers, directors and consultants. The stock option plan provides
for the granting of both incentive stock options and non-qualified stock
options.
Options can be granted under the stock option plan on such terms and at
such prices as determined by the Board of Directors, or a committee thereof,
except that the per share exercise price of options will not be less than the
fair market value of the common stock on the date of grant. In the case of an
incentive stock option granted to a stockholder who owns stock of the our
company possessing more than
-27-

10% of the total combined voting power of all classes of stock, the per share
exercise price will not be less than 110% of such fair market value.
Options granted under the stock option plan are not exercisable after the
expiration of ten years from the date of grant or five years in the case of
incentive stock options granted to a 10% stockholder, and are not transferable
other than by will or by the laws of descent and distribution.
We have outstanding options to purchase 613,000 shares of common stock, net
of forfeitures and exercises, under the stock option plan at exercise prices
ranging from $2.00 to $5.18 per share. The grant of 213,000 of the options are
subject to shareholder approval.
-28-

PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 23, 1999,
relating to the beneficial ownership of shares of common stock by (1) each
person or entity who we know to own beneficially 5% or more of our outstanding
common stock, (2) each of our directors, (3) the Named Executive, and (4) all of
our directors and executive officers as a group. Except as noted, we believe
that all persons named in the table have sole voting and investment power with
respect to all shares of common stock beneficially owned by them.

The number of shares of common stock beneficially owned by Nicko Feinberg's
shares includes options to purchase 40,000 shares of common stock held by Mr.
Feinberg.
The number of shares of common stock beneficially owned by Stephen J.
Cole-Hatchard includes 144,000 shares held by the Cole-Hatchard Family Limited
Partnership, of which Mr. Cole-Hatchard is the general partner, and options to
purchase 99,000 shares of common stock. Does not include 17,500 shares held by
Mr. Cole-Hatchard's mother and brother and warrants to purchase 64,000 shares
held by Mr. Cole-Hatchard's mother.
The number of shares beneficially owned by Michael Olbermann includes
options and warrants to purchase 40,000 shares of common stock.
The number of shares of common stock beneficially owned by Ronald Signore
includes (1) warrants to purchase 39,200 shares of common stock held by The
Rough Group, of which Mr. Signore is a general partner, (2) 3,200 shares of
common stock held by The Rough Group and (3) options to purchase 25,000 shares
of common stock held by Mr. Signore. Mr. Signore disclaims beneficial ownership
of other securities held by The Rough Group.
The number of shares of common stock beneficially owned by all directors
and executive officers as a group includes options and warrants to purchase
278,200 shares of common stock.
-29-

CERTAIN TRANSACTIONS
In May 1997 we issued promissory notes in the amounts of $141,800, $66,800
and $163,537 to Nicko Feinberg and Stephen J. Cole-Hatchard, officers and
directors of our company, and Michael Char, a former officer and director of our
company. Included in such indebtedness was $21,737 and $35,000 of advances made
to us by Messrs. Char and Cole-Hatchard to establish additional
points-of-presence. The promissory notes were issued to Messrs. Feinberg, Char
and Cole-Hatchard in partial consideration of their efforts in founding our
company.
In August 1997, we borrowed $60,000 from Mr. Cole-Hatchard bearing interest
at the rate of 9.25% per annum. We repaid $30,000 of such indebtedness in
December 1997. The balance was repaid in May 1998 directly to Mr.
Cole-Hatchard's lender, Provident Savings Bank.
In March 1998, we entered into a settlement agreement with Mr. Char under
which Mr. Char discontinued a lawsuit and released us from all claims in
consideration of (1) $65,000 and (ii) a payment of $435,000 in May 1998 to
satisfy $240,000 of existing obligations due to Mr. Char and repurchase 231,520
shares from Mr. Char.
In May 1998, we repaid $20,000 of indebtedness to each of Messrs.
Cole-Hatchard and Feinberg. The balance of the indebtedness owed to Messrs.
Cole-Hatchard and Feinberg of $46,800 and $121,800 bears interest at the rate of
8% per annum and is due at such time as we achieve $1.9 million in pre-tax
earnings, but in no event sooner than May 13, 2000.
Mr. Cole-Hatchard's mother and brother purchased 20,000 shares at $2.00 per
share in our private placement in May 1997. The Rough Group, a general
partnership of which Mr. Signore, one of our directors, is a general partner,
purchased 16,000 shares in our private placement in May 1997. In addition, Mr.
Cole-Hatchard's mother and The Rough Group purchased $40,000 and $85,000
principal amount of promissory notes in our December 1997 private placement, and
received warrants to purchase 64,000 and 196,000 shares at an exercise price of
$5.00 per share. The notes were repaid in May 1998.
In August 1998, Mr. Cole-Hatchard borrowed $46,800 from us evidenced by a
demand promissory note bearing interest at the rate of 8% per annum.
In September 1998, Mr. Feinberg borrowed $55,000 from us evidenced by a
demand promissory note bearing interest at the rate of 8% per annum. In October
1998, Mr. Feinberg borrowed an additional $42,000 on the same terms.
We believe that the foregoing transactions were on terms no less favorable
than those that could have been obtained from unaffiliated third parties. All
future transactions between us and our affiliates will be on terms no less
favorable than would be obtained from unaffiliated third parties.
-30-

DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 10,000,000 shares of common stock, par value
$.01 per share, and 1,000,000 shares of preferred stock, par value $.01 per
share. As of the date of this prospectus, there are 3,388,700 shares of common
stock outstanding and 10 shares of preferred stock outstanding designated as
series A preferred stock.
Common Stock
The holders of our common stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voting for the election of
directors can elect all of the directors then up for election. The holders of
common stock are entitled to receive dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of our company, the holders of common
stock are entitled to share in all assets remaining which are available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the common stock.
Holders of shares of common stock, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
common stock. All of the outstanding shares of common stock are, and the shares
of common stock offered hereby, will be, fully paid and nonassessable.
Preferred Stock
We are authorized to issue 1,000,000 shares of preferred stock from time to
time in one or more series, in all cases ranking senior to the common stock with
respect to payment of dividends and in the event of the liquidation, dissolution
or winding-up of our company. There are currently 10 shares of preferred stock
outstanding, designated as series A convertible preferred stock. The Board has
the power, without stockholder approval, to issue shares of one or more series
of preferred stock, at any time, for such consideration and with such relative
rights, privileges, preferences and other terms as the Board may determine,
including terms relating to dividend rates, redemption rates, liquidation
preferences and voting, sinking fund and conversion or other rights. The rights
and terms relating to any new series of preferred stock could adversely affect
the voting power or other rights of the holders of the common stock or could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of our company.
Series A Convertible Preferred Stock
The shares of series A convertible preferred stock will be automatically
converted on July 15, 1999 into shares of common stock having a market value of
$1,000,000 on the date of conversion, up to a maximum of 250,000 shares. Holders
of the shares of series A convertible preferred stock are not entitled to voting
or preemptive rights.
-31-

Public Warrants
Each public warrant entitles the holder to purchase one share of common
stock at a price of $4.80 at any time between May 13, 1999 and May 13, 2003.
We may redeem the public warrants at any time commencing June 13, 1999,
upon notice of not less than 30 days, at a price of $.10 per public warrant,
provided that the closing bid quotation of our common stock on all 20 trading
days ending on the third day prior to the day on which we give notice has been
at least $7.20 and we obtain written approval of the underwriter of our initial
public offering to such redemption. The public warrant holders shall have the
right to exercise their public warrants until the close of business on the date
fixed for redemption.
The public warrants may be exercised upon surrender of the public warrant
certificate during the exercise period at the offices of the warrant agent, with
the exercise form on the reverse side of the public warrant certificate
completed and executed as indicated, accompanied by full payment of the exercise
price to the warrant agent for the number of public warrants being exercised.
The public warrant holders do not have the rights or privileges of holders of
common stock.
No public warrant will be exercisable unless at the time of exercise we
have filed a current registration statement with the Securities and Exchange
Commission covering the shares of common stock issuable upon exercise of such
public warrant and such shares have been registered or qualified or deemed to be
exempt from registration or qualification under state securities laws. We will
use our best efforts to have all such shares so registered or qualified on or
before the exercise date and to maintain a current prospectus relating thereto
until the expiration of the public warrants.
Underwriter's Warrants
We issued to the underwriter of our initial public offering and its
designees warrants to purchase 160,000 shares of Common Stock at an exercise
price of $6.60 per share and 160,000 warrants (each to purchase one share of
common stock at $7.92 per share) at an exercise price of $.165 per warrant. The
underwriter's warrants are exercisable at any time and from time to time, in
whole or in part, during the five-year period ending on May 13, 2003.
Private Placement Warrants
In December 1997, we issued warrants to purchase 300,000 shares of common
stock in a private transaction. Each such warrant entitles the holder to
purchase one share of common stock at a price of $5.00 per share subject to
adjustment in certain circumstances.
In March 1999, we issued warrants to purchase 21,662 shares of common
stock. Each such warrant entitles the holder to purchase one share of common
stock at a price of $13.849 at any time between March 25, 1999 and March 25,
2002.
Repricing and Anti-Dilution Rights
In March 1999, we issued 158,856 shares of common stock in a private
placement for $2,000,000. Each purchaser also received one repricing right to
receive additional shares of common stock if the market price of our common
stock falls to certain price levels. We may be required to issue up to an
additional 180,518 shares of common stock to satisfy repricing rights as well as
adjustments to the warrants issued in March 1999 described above.
-32-

Transfer Agent and Warrant Agent
The transfer and registrar agent for our common stock and warrant agent for
the public warrants is American Securities Transfer & Trust, Inc., Denver,
Colorado.
-33-

SELLING STOCKHOLDERS
The following table sets forth certain information as of April 23, 1999,
relating to the selling stockholders. None of the selling stockholders has ever
held any position or office with us or had any material relationship with us,
other than Doris Cole-Hatchard, who is the mother of Stephen J. Cole-Hatchard,
our chief executive officer, The Rough Group, a general partnership of which
Ronald Signore, who is one of our directors, is a general partner, and
Werbel-Roth Securities, Inc. and Comprehensive Capital Corporation and their
designees, the underwriters of our initial public offering. The shares
beneficially owned do not include shares issuable under repricing rights or
anti-dilution provisions.

PLAN OF DISTRIBUTION
Sales of the shares may be made from time to time by the selling
stockholders. Such sales may be made on the Nasdaq SmallCap Market in another
over-the-counter market, on a national securities exchange, any of which may
involve crosses and block transactions, in privately negotiated transactions or
otherwise or in a combination of such transactions at prices and at terms then
prevailing or at prices related to the then current market price, or at
privately negotiated prices. In addition, any shares covered by this prospectus
which qualify for sale pursuant to Section 4(1) of the Securities Act of 1933 or
Rule 144 promulgated thereunder may be sold under such provisions rather than
pursuant to this prospectus. Without limiting the generality of the foregoing,
the shares may be sold in one or more of the following types of transactions:
o a block trade in which the broker-dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus;
o an exchange distribution in accordance with the rules of such
exchange;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the
selling stockholders may arrange for other brokers or dealers to
participate in the resale.
In connection with distributions of the shares or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares in the course of hedging the positions they assume with selling
stockholders. The selling stockholders may also sell shares short and deliver
the shares to close out such short positions. The selling stockholders may also
enter into option or other transactions with broker-dealers which require the
delivery to the broker-dealer of the shares, which the broker-dealer may resell
under this prospectus. The selling stockholders may also pledge the shares to a
broker or dealer and upon a default, the broker or dealer may effect sales of
the pledged shares.
Brokers or dealers may receive compensation in the form of commissions,
discounts or concessions from selling stockholders in amounts to be negotiated
in connection with the sale. Such brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with such sales and any such commission, discount or concession may be deemed to
be underwriting discounts or commissions under the Securities Act of 1933.
Compensation to be received by broker-dealers retained by the selling
stockholders in excess of usual and customary commissions, will, to the extent
required, be set forth in a supplement to this prospectus. Any dealer or broker
participating in any distribution of the shares may be required to deliver a
copy of this prospectus, including a supplement to any person who purchases any
of the shares from or through such dealer or broker.
During such time as they may be engaged in a distribution of the shares the
selling stockholders are required to comply with Regulation M promulgated under
the Securities Exchange Act of 1934. With certain exceptions, Regulation M
precludes any selling stockholder, any affiliated purchasers and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchases made in order to
stabilize the price of a security in connection with the distribution of that
security. All of the foregoing may affect the marketability of the common stock.
-35-

It is possible that a significant number of shares may be sold and,
accordingly, such sales or the possibility thereof may have a depressive effect
on the market price of our common stock.
In connection with the solicitation of the exercise of the public warrants
after June 13, 1999, Werbel-Roth Securities, Inc. may receive a fee of 5% of the
exercise price for each warrant exercised. Werbel-Roth Securities, Inc. will not
be entitled to receive such compensation in warrant exercise transactions in
which (1) the market price of common stock at the time of exercise is lower than
the exercise price of the warrants; (2) the warrants are held in any
discretionary account; (3) disclosure of compensation arrangements is not made,
in addition to the disclosure provided in this prospectus, in documents provided
to holders of warrants at the time of exercise; (4) the exercise of the warrants
is unsolicited; or (5) the solicitation of the warrants was in violation of
Regulation M promulgated under the Exchange Act.
-36-

LEGAL MATTERS
Tenzer Greenblatt LLP, New York, New York will pass upon the validity of
the common stock.
EXPERTS
Our financial statements as of December 31, 1998 and for the two years then
ended included in this prospectus have been included in reliance upon the
report of BDO Seidman, LLP, independent accountants, given upon the authority
of that firm as experts in accounting and auditing.
The financial statements of WOWfactor, Inc. as of December 31, 1997 and for
the two years then ended included in this prospectus have been included in
reliance upon the report of BDO Seidman, LLP, independent accountants, given
upon the authority of that firm as experts in accounting and auditing.
The financial statements of Roxy Systems, Inc. d/b/a Magic Carpet as of
December 31, 1997 and for the one year then ended included in this prospectus
have been included in reliance upon the report of BDO Seidman, LLP, independent
accountants, given upon the authority of that firm as experts in accounting and
auditing.
The financial statements of US Online, Inc. as of December 31, 1996 and
1997 and for the two years then ended included in this prospectus have been
included in reliance upon the reports of Joseph J. Repko, CPA given upon his
authority as expert in accounting and auditing.
The financial statements of Webspan, Inc. as of December 31, 1996 and 1997
and for the two years then ended included in this prospectus have been included
in reliance upon the reports of Steven H. Mermelstein, CPA, given upon his
authority as expert in accounting and auditing.
ADDITIONAL INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934 and, in accordance therewith, file reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
may be inspected and copied at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, IL 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the SEC upon payment of certain fees prescribed by the SEC.
The SEC's Web site contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of that site is http://www.sec.gov. Our common stock is quoted on the
Nasdaq National Market and our reports, proxy statements and other information
may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
We have filed a registration statement on Form SB-2 with the SEC under the
Securities Act with respect to the securities offered in this prospectus. This
prospectus, which is filed as part of a registration statement, does not contain
all of the information set forth in the registration statement, certain portions
of which have been omitted in accordance with the SEC's rules and regulations.
Statements made in this prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete and are qualified in
their entirety by reference to each such contract, agreement or other document
which is filed as an exhibit to the registration statement. The registration
statement may be inspected without charge at the public reference facilities
maintained by the SEC, and copies of such materials can be obtained from the
Public Reference Section of the SEC at prescribed rates.
-37-

Report of Independent Certified Public Accountants
To the Board of Directors of
Frontline Communications Corporation
We have audited the accompanying consolidated balance sheet of Frontline
Communications Corporation (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended December 31, 1997 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1998, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
New York, New York
March 12, 1999, except

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
1. Summary of Significant Accounting Policies
Business
Frontline Communications Corporation ("Frontline" or the "Company") is an
internet service provider and Competitive Local Exchange Carrier ("CLEC")
that offers E-commerce and internet access to individual and business
subscribers located in the Northeast United States.
Frontline consummated an initial public offering ("IPO") during May 1998
and raised net proceeds of $5,810,405 (see Note 10).
Reorganization and Principles of Combination
The consolidated financial statements include the accounts of Hobbes & Co.,
LLC ("Hobbes"), INET Communications Company, LLC ("INET") and Sarah Girl &
Co., LLC ("Sarah Girl"), (collectively the "Predecessor Companies") and
Frontline Communications Corporation. As described more fully in Note 2, on
May 30, 1997, Frontline acquired the net assets of the Predecessor
Companies. For accounting purposes, the business consolidation has been
accounted for as if the acquirer was Hobbes. With respect to the
acquisition of INET, the acquisition has been accounted for as a
consolidation of entities under common control in a manner similar to a
pooling of interests and reflects the consolidated financial position,
operating results and cash flows of Hobbes and INET as if they had been
consolidated for all periods presented. With respect to Sarah Girl and
Frontline, the business consolidation has been accounted for using purchase
accounting, which resulted in the recording of a special non-cash charge of
$1,230,000. The non-cash charge represents the estimated fair market value
of the Company's 820,000 shares of common stock issued to certain founding
shareholders in February 1997 for current and future services. An
additional non-cash charge was taken for the value of services on stock
issued to a director. The Predecessor Companies were dissolved and
Frontline is the continuing legal entity. All intercompany accounts and
transactions have been eliminated.
F-8

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany balances and transactions
have been eliminated.
Property, Equipment and Depreciation
Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization is computed over the estimated
useful lives of the assets using the straight-line method.
The following estimated useful lives are applied in the computation of
depreciation and amortization:
Years
----------------------------------------------------------------------
Computer and office equipment 3-5
Furniture and fixtures 5
Leasehold improvements Lease term
======================================================================
Intangible Assets
Intangible assets include goodwill, the excess of the cost of purchased
businesses over the fair value of the net acquired, and purchased customer
bases. Amortization is computed using the straight-line basis over three
years, the expected benefit period.
Revenue Recognition
Monthly subscription service revenue is recognized over the period in which
services are provided. Service revenues derived from dedicated access
services, which require the installation and use of Company provided
equipment at a subscriber's location, are recognized when the service is
commenced. Fee revenues for ancillary services are recognized as services
are performed. Deferred revenue represents prepaid access fees by
subscribers.
F-9

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Long-Lived Assets
Long-lived assets, such as property and equipment, intangibles and customer
bases, are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable
through the estimated undiscounted future cash flows from the use of these
assets. When any such impairment exists, the related assets will be written
down to fair value. No write downs were necessary for the years ended
December 31, 1997 and 1998.
Income Taxes
Deferred income taxes are provided on differences between the financial
reporting and income tax bases of assets and liabilities based upon
statutory tax rates enacted for future periods. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Use of Estimates
In preparing the consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amount of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Many of the Company's estimates and
assumptions used in the financial statements related to the Company's
industry which are subject to rapid technological change. It is reasonably
possible that changes may occur in the near term that would affect
management's estimates with respect to the carrying values of plant and
equipment, intangibles and customer bases.
F-10

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade accounts receivable. The Company's cash investments
are placed with high credit quality financial institutions and may exceed
the amount of federal deposit insurance. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base.
Cash and Cash Equivalents
The Company considers all highly liquid money market instruments purchased
with an original maturity of three months or less to be cash equivalents.
Cash equivalent instruments were $-0- and $1,766,267 at December 31, 1997
and 1998, respectively.
Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivable, notes receivable from (payable to) stockholders and accounts
payable approximated fair value as of December 31, 1998, because of the
relatively short maturity of these instruments.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", establishes a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company adopted the employee stock-based compensation
provisions of SFAS No. 123 by disclosing the pro forma net income and pro
forma net income per share amounts assuming the fair value method. Stock
arrangements with non-employees, if applicable, are recorded at fair value.
F-11

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Advertising
All costs associated with advertising services are expensed in the period
incurred. Advertising expense was approximately $28,000 and $ 136,000 for
the years ended December 31, 1997 and 1998, respectively.
Loss Per Share
The Company has adopted SFAS No. 128, "Earnings per Share," which provides
for the calculation of "basic" and "diluted" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect, in
periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants. Diluted earnings per
share amounts have not been reported because the Company has a net loss and
the impact of the assumed conversion of preferred stock and exercise of
stock options and warrants would be anti-dilutive.
Effect of Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which
requires companies to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not presently enter into
any transactions involving derivative financial instruments and,
accordingly, does not anticipate the new standard will have any effect on
its financial statements.
F-12

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
2. Reorganization
On May 30, 1997, the Predecessor Companies were acquired by the Company by
issuing three notes aggregating $325,000 (see Note 6) for all the
membership interest in the Predecessor Companies. For accounting purposes
Hobbes has been considered to be the acquirer. As a result, the business
consolidation of Hobbes and INET has been accounted for as a consolidation
of entities under common control in a manner similar to a pooling of
interests. The business consolidation with Sarah Girl and Frontline have
been accounted for as purchases. The net assets and operations of Sarah
Girl and Frontline are not material to the Company's consolidation
financial statements. Notes payable to the members of the Predecessor
Companies are accounted for as distributions in the accompanying
consolidated statements of stockholders' equity.
3. Notes Receivable from Stockholders
During August and October 1998, the Company made advances aggregating
$143,800 to two of its stockholders. The notes are due on demand and bear
interest at 8% which is offset against the interest payable from the
stockholders (see Note 6).
4. Acquisition of Businesses
During 1998, the Company made the following acquisitions all of which were
accounted for using the purchase method of accounting with the results of
each acquisition included in the consolidated financial statements from the
respective acquisition date. The acquisition resulted in intangibles of
$3,215,226, which are being amortized over their expected benefit period of
3 years.
At December 31, 1998, intangibles were as follows:
Customer
Goodwill bases Total
-----------------------------------------------------------------
Intangibles $1,143,998 $2,071,228 $3,215,226
Less: Accumulated
amortization 88,979 44,921 133,900
-----------------------------------------------------------------
$1,055,019 $2,026,307 $3,081,326
=================================================================
F-13

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
WOWFactor
On October 9, 1998, the Company acquired all of the issued and outstanding
capital stock of WOWFactor, Inc. ("WOWFactor"), a New Jersey corporation
engaged in the business of promoting e-commerce through its web sites
primarily for women's businesses. The Company issued to the stockholders of
WOWFactor ten shares of newly created Series A preferred stock, which is
convertible on July 15, 1999 into common stock with a market value of
$1,000,000, subject to a maximum issuance of 250,000 shares. In addition,
to the extent that the Company's common stock has a market value on July
15, 1999 of (i) less than $3.00 per share or (ii) greater than $3.00 per
share but less than $4.00 per share, the Company agreed to issue to the
WOWFactor stockholders options to purchase up to an aggregate of 100,000 or
50,000 shares, respectively.
Roxy Systems d/b/a Magic Carpet
On October 9, 1998, the Company acquired substantially all of the assets
used in the business of Roxy Systems, Inc. d/b/a Magic Carpet ("Roxy") in
consideration of $75,000 in cash and the assumption of approximately
$60,000 of liabilities. Roxy is an internet service provider which, at the
date of acquisition, had approximately 1,000 individual and business
subscribers in Orange County, New York.
US Online
Pursuant to an order of the United States Bankruptcy Court, District of New
Jersey, on October 23, 1998, the Company acquired substantially all of the
assets used in the business of US Online, Inc. ("US Online"), including a
point of presence in the Philadelphia area, and assumed two of US Online's
executory contracts for consideration of $570,000 in cash paid upon
closing. At the time of the acquisition, US Online was engaged in the
business of providing internet access, web hosting and leased
communications lines to approximately 3,500 subscribers in New York, New
Jersey and Pennsylvania.
F-14

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
Webspan
On December 17, 1998, the Company acquired substantially all of the assets
used in the business of Webspan Communications, Inc. ("Webspan") in
consideration of $500,000 in cash, assumption of approximately $544,000 of
liabilities and an aggregate of 113,364 shares of the Company's common
stock (approximately $509,000). At the time of the acquisition, Webspan was
an internet service provider with approximately 9,000 individual and
business subscribers in New York and New Jersey.
The following pro forma consolidated financial information has been
prepared to reflect the 1998 acquisitions. The pro forma financial
information is based on the historical financial statements of the Company
and those of the acquired businesses. The accompanying pro forma operating
statements are presented as if the acquisitions occurred on January 1,
1997. The pro forma financial information is unaudited and is not
necessarily indicative of what the actual results of operations of the
Company would have been assuming the acquisitions had been completed as of
January 1, 1997, and neither is it necessarily indicative of the results of
operations for future periods.
Year ended December 31, 1997 1998
--------------------------------------------------------------------------
(unaudited)
Revenues $ 2,383,063 $ 2,635,923
Net loss (5,320,805) (4,307,399)
==========================================================================
Net loss per share - basic and diluted $ (3.85) $ (1.69)
==========================================================================
The above unaudited pro forma consolidated financial information has been
adjusted to reflect amortization of intangibles as generated by the
acquisitions over a three-year period, WOWFactor officer's employment
agreement entered into at the date of acquisition, the conversion of the
preferred shares issued in the WOWFactor acquisition and the issuance of
113,364 common shares in the Webspan acquisition.
F-15

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
5. Property and Equipment
Property and equipment consisted of the following:
December 31, 1998
-------------------------------------------------------------------
Computer and office equipment $1,070,492
Furniture and fixtures 38,705
Leasehold improvements 13,783
-------------------------------------------------------------------
1,122,980
Less: Accumulated depreciation and
amortization 141,195
-------------------------------------------------------------------
$ 981,785
===================================================================
6. Notes Payable Stockholders
On May 30, 1997, the Company issued notes aggregating $372,137 to three of
its stockholders related to the reorganization discussed in Note 2, and
certain advances made to the Company since inception. The notes bear
interest at 8%. To date $203,537 has been repaid and $168,600 will be
deferred until such time as the Company achieves $1.9 million in pre-tax
earnings, but in no event sooner than May 2000.
7. Capital Lease Obligations
The Company leases computer equipment under capital leases. The assets
acquired under capital leases have a cost of $207,725 and accumulated
depreciation of $-0- as of December 31, 1998.
F-16

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
The Company has entered into three-year employment agreements with certain
officers and employees which provide for aggregate annual base compensation
of approximately $401,000, and such bonuses as the Board of Directors may,
in its sole discretion, from time to time determine. These employment
agreements, which expire in August 2000 and September 2001, provide for
employment on a full-time basis (except for the Company's agreement with
its Chief Executive Officer) and contain a provision that the employee will
not compete or engage in a business competitive with the current or
anticipated business of the Company during the term of the employment
agreement and for a period of two years thereafter.
9. Stock Options
The Company has a stock option plan (the "Plan"), which authorized the
issuance of incentive options and non-qualified options to purchase up to
500,000 shares of common stock. The plan has a ten year term. The Board
retained the authority to determine the individuals to whom, and the times
at which, stock options would be made, along with the number of shares,
vesting schedule and other provisions related to the stock options.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations by recording
compensation expense for the excess of fair market value and the
exercisable price per share as of the date of the grant in accounting for
its stock options. Accordingly, no compensation costs have been recognized
for its issuance of options to employees since the exercise price exceeded
the then fair market value on the date of the grant. In accordance with
SFAS No. 123, the Company has recognized $108,000 and $175,137 as the fair
value of services received for the 136,000 and 103,000 options granted to
non-employees during 1997 and 1998, respectively.
F-18

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
SFAS No. 123 requires the Company to provide pro forma information
regarding net loss and net loss per share as if compensation cost for the
Company's stock options had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The Company estimates fair
value of each stock based option at the date of the grant using the Black
Scholes option-pricing model with the following weighted average
assumptions used for options in 1997 and 1998:
1997 1998
--------------------------------------------------------------------------
Risk-free interest rate 6.51% 4.29% - 5.48%
Expected life 5 years 5 years
Expected volatility 15.00% 46.10%
Dividend yield None None
==========================================================================
Under the accounting provisions of SFAS No. 123, the Company's net loss and
loss per share would have been reduced to the pro forma amounts indicated
below:
1997 1998
--------------------------------------------------------------------------
Net loss:
As reported $(2,037,417) $(1,744,099)
Pro forma (2,037,417) (2,060,753)
==========================================================================
Net loss per share (basic and diluted):
As reported $ (1.67) $ (.72)
Pro forma (1.67) (.85)
==========================================================================
Stock options granted prior to 1998 were considered to have minimal value
based on the fair value method of SFAS No. 123.
F-19

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
A summary of the status of the Company's stock option plan as of December
31, 1997 and 1998, and changes during the years ending on those dates, is
presented below:

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
10. Capital Stock and Warrants
At December 31, 1998, there was an aggregate of 2,460,000 warrants
outstanding at exercise prices between $4.80 and $7.92 per share, expiring
at various times through 2003, as follows:
In December 1997, as partial consideration for a loan, the Company granted
warrants to purchase 300,000 shares, at an exercise price of $5.00 per
share, expiring in December 2003. These warrants were valued at $24,000 and
recorded as a debt discount.
As part of its IPO in February 1998, the Company offered and sold warrants
(the "Public Warrants") to purchase 1,840,000 shares, at an exercise price
of $4.80 per share, expiring in February 2003.
In March 1998, the Company effected a 4 for 5 reverse stock split. All
shares and per share data in the consolidated financial statements have
been adjusted to give retroactive effect to the reverse stock split.
Additionally, during May 1998, the Company sold to the underwriter of the
IPO, warrants to purchase 160,000 shares, at an exercise price of $6.60 per
share, and 160,000 shares, at an exercise price of $7.92 per share. These
warrants expire in May 2003.
The Board of Directors is authorized to fix the rights, preferences,
privileges and restrictions of any series of preferred stock, including the
dividend rights, original issue price, conversion rights, voting rights,
terms of redemption, liquidation preferences and sinking fund terms
thereof, and the number of shares constituting any such series and the
designation thereof and to increase or decrease the number of shares
subsequent to the issuance of shares of such series (but not below the
number of shares of such series then outstanding).
F-21

Frontline Communications Corporation
Notes to Consolidated Financial Statements
================================================================================
11. Income Taxes
The Company had net operating loss carryforwards of approximately
$1,500,000 at December 31, 1998, which expire beginning in 2111. The tax
benefit of these losses has been completely offset by a valuation allowance
due to the uncertainty of its realization.
12. Litigation Settlement
In connection with a settlement of all disputes with a former officer, the
Company purchased 231,520 shares of common stock owned by that officer for
$264,113. These amounts were accounted for as treasury stock in the
accompanying balance sheet.
13. Subsequent Event
In March 1999, the Company entered into an agreement with two institutional
investors pursuant to which the Company sold 158,856 shares of common
stock, at prevailing market price, for an aggregate purchase price of
$2,000,000. The agreement with the investors provides for certain
registration and repricing rights. The Company may, at any time prior to
the effectiveness of registration, redeem the common stock issued in its
entirety for a premium. The Company also issued 21,662 warrants to purchase
common stock for 13.849 per share. The warrants are exercisable on or
before March 25, 2002.
F-22

FRONTLINE COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
BASIS OF COMBINATION- PRO FORMA
The accompanying unaudited pro forma combined statement of operations has
been derived from Frontline Communications Corporation's (the " Company")
consolidated statement of operations for the year ended December 31, 1998 and
the historical statements of operations of the acquired businesses from January
1, 1998 to the respective dates of acquisition. Adjustments have been made to
such information to give effect to the following transaction and events as if
each had occurred as of the beginning of the period covered by the combined
statement of operations:
A. The Company's acquisition of all of the issued and outstanding stock
of WOW Factor, Inc. ("WOWFactor) on October 9, 1998.
B. The Company's acquisition of substantially all of the assets used in
the business of Roxy Systems, Inc. d/b/a Magic Carpets on October 9,
1998.
C. The Company's acquisition of substantially all of the assets used in
the business of US Online, Inc. on October 23, 1998
D. The Company's acquisition of substantially all of the assets used in
the business of Webspan Communications, Inc. ("Webspan") on December
17, 1998.
The aggregate consideration for the above acquisitions approximated
$3,595,000 and resulted in intangibles of $3,215,226. The intangibles are
being amortized over their expected benefit period of 3 years.
The pro forma combined statement of operations has been adjusted to reflect
amortization of intangibles as generated by the acquisitions over a
three-year period, WOW Factor officer's employment agreement entered into
at the date of acquisition, the conversion of the preferred shares issued
in the WOWFactor acquisition and the issuance of 113,364 common shares in
the Webspan acquisition.
The accompanying pro forma financial information has been included as required
and allowed by the rules of the Commission, is provided for information purposes
only and does not purport to represent what the Company's results of operations
would have been had such transactions in fact occurred at the beginning of the
period presented or to project the Company's results of operations or financial
position in, or for, any future periods.
The accompanying unaudited proforma condensed financial statements should be
read in conjunction with the respective historical financial statements of the
Company, WOW Factor, Magic Carpets, US Online, Inc. and Webspan, which are
contained elsewhere herein.
-1-

Report of Independent Certified Public Accountants
WOWFactor, Inc.
Montclair, New Jersey
We have audited the accompanying balance sheet of WOWFactor, Inc. as of December
31, 1997 and the related statements of operations, stockholders' deficit and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WOWFactor, Inc. as of December
31, 1997, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
New York, New York
December 18, 1998

See accompanying summary of business and significant accounting
policies and notes to financial statements.
F-7

WOWFactor, Inc.
Summary of Business and Significant Accounting Policies
================================================================================
Business
WOWFactor, Inc. (the "Company") which was incorporated in 1995, and
commenced business as an internet web-based Company providing consumer and
business goods and services, focusing on women business owners.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Equipment and Depreciation
Equipment is stated at cost. Depreciation is computed using the double
declining balance method over the estimated useful lives of the assets of
five years.
Income Taxes
The Company is taxed as an S corporation under the provisions of the
Internal Revenue Code. The stockholder's report the Company's taxable
income or loss in their personal income tax returns. Accordingly, Federal
as well as State of New Jersey income taxes or benefits are not reflected
in the financial statements.
Deferred taxes are inconsequential as a result of the Company's tax status.
Revenue Recognition
Revenues were derived from various internet related services and are
recognized in the month in which services are provided.
F-8

WOWFactor, Inc.
Notes to Financial Statements
================================================================================
1. Equipment
Equipment, as presented on the balance sheet, is as follows:
December 31, 1997
-------------------------------------------------
Equipment $ 25,379
Less: Accumulated depreciation (13,209)
-------------------------------------------------
$ 12,170
=================================================
2. Related Party Transactions
(a) The Company has outstanding, at December 31, 1997, noninterest bearing
notes payable to a related party totaling $60,000. These notes were
repaid during 1998.
(b) In 1997 and 1996, shareholders made cash capital contributions of
$96,123 and $68,140, respectively.
(c) The Company's operations are conducted at the home of the principal
stockholder at no expense to the Company. Management has determined
that the cost of such space cannot be reasonably estimated and has
therefore chosen not to disclose such information.
3. Noncash Compensation
During 1997 and 1996, the Company recognized contributed capital in lieu of
the payments of salaries and fees to certain stockholders. The amounts
recognized as expense and contributed capital in the financial statements
were $234,000 and $259,000 in 1997 and 1996, respectively.
F-9

WOWFactor, Inc.
Notes to Financial Statements
================================================================================
4. Subsequent Event
On October 9, 1998, the Company entered into an agreement with Frontline
Communications Corporation (the "Purchaser") whereby ten (10) shares of
Series A Convertible Preferred Stock of the Purchaser ("Series A
Preferred"), convertible on July 15, 1999 into common stock, par value $0.1
per share, having a market value of $1,000,000 on the conversion date, were
transferred in consideration of all the authorized, issued and outstanding
shares of the Company's common stock. The conversion feature, however,
provides for a limitation that under no circumstances shall the Series A
Preferred stock be convertible into the Purchaser's common stock
aggregating more than 250,000 shares. In connection with the transactions,
stock options were granted to the Company's former shareholders to be
exercised on July 15, 1999 under the conditions that (a) if the Purchaser's
common stock has a market value on July 15, 1999 of less than $3.00 per
share, up to 100,000 shares may be purchased under the option or (b) if the
Purchaser's common stock has a market value of less than $4.00 per share
but greater than $3.00 per share, options to purchase will be limited to
50,000 shares.
F-10

Report of Independent Certified Public Accountants
Roxy Systems, Inc., D/B/A Magic Carpet
Middletown, New York
We have audited the accompanying balance sheet of Roxy Systems, Inc., D/B/A
Magic Carpet as of December 31, 1997 and the related statements of operations,
stockholder's deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Roxy Systems, Inc., D/B/A Magic
Carpet at December 31, 1997, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
Certified Public Accountants
New York, New York
December 22, 1998

See accompanying summary of business and significant accounting
policies and notes to financial statements.
F-7

Roxy Systems, Inc.,
D/B/A Magic Carpet
Summary of Business and Significant Accounting Policies
================================================================================
Business Roxy Systems, Inc., D/B/A Magic Carpet (the
"Company") is an internet service provider
that offers "dial-up" Internet access
primarily to individual subscribers. The
Company provides subscribers with direct
access to a wide range of Internet
applications and resources, including
electronic mail, world wide web sites and
regional and local information and data
services.
Use of Estimates The preparation of the financial statements
in conformity with generally accepted
accounting principles requires management
to make estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Property, Equipment and Equipment is stated at cost. Depreciation
Depreciation is computed over the estimated useful lives
of the assets by the straight-line method
for property and equipment.
Revenue Revenue from monthly Internet service are
recognized in the month in which services
are provided.
Income Taxes The Company is taxed as an S corporation
under the provisions of the Internal
Revenue Code. The stockholder reports the
Company's taxable income or loss in his
personal income tax return. Accordingly,
Federal as well as New York State income
taxes or benefits are not reflected in the
financial statements.
Deferred taxes are inconsequential as a
result of the Company's tax status.
F-8

Roxy Systems, Inc.,
D/B/A Magic Carpet

Notes to Financial Statements
================================================================================
1. Property and Property and equipment, as presented on the
Equipment, Net balance sheet, is as follows:
December 31, 1997
-------------------------------------------
Equipment $ 31,825
Furniture and fixtures 2,025
-------------------------------------------
33,850
Less: Accumulated depreciation (12,770)
-------------------------------------------
$ 21,080
===========================================
2. Related Party The stockholder of the Company has made
Transactions advances to the Company totaling $15,860 at
December 31, 1997. These advances were in
the form of noninterest-bearing notes that
are due on demand.
The Company's operations are conducted at
the home of a relative of the stockholder
on a month-to-month basis at a rate of $100
per month.
3. Subsequent Event On October 9, 1998, the Company transferred
all assets, trademarks, service marks,
patents, contracts and similar rights to
Frontline Communications Corp., (the
"Purchaser"). Pursuant to the agreement,
the Purchaser assumed up to $60,348 in past
due obligations of the Company.
Additionally, a two year noncompete
agreement was executed by the Company and
all stockholders, partners, owners,
officers and directors of the Company, as
relating to the ownership, operations of,
or employment in an Internet service
provider or other web services company
directly competing with purchaser. In
consideration thereof, the Company received
$100,000.
F-9

INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
U.S. Online, Inc.
Mount Laurel, NJ 08054
I have audited the accompanying balance sheet of U.S. Online, Inc. as of
December 31, 1997 and the related statement of operations, shareholders equity,
and cash flows for the period then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern.
As shown in the financial statements, the company incurred a substantial net
loss of $1,310,142 for 1997. At December 31, 1997, current liabilities exceeded
current assets by $1,399,853 and total liabilities exceed total assets by
$1,036,621. These factors, and others discussed in Note 18 specifically the
bankruptcy filings under Chapter 11 and then conversion to Chapter 7,
liquidation, indicates that the company will not continue to exist. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that will be necessary in the circumstances. In
addition, I was unable to obtain written representations from one of the
directors of U.S. Online, Inc.
Because of the effects of any adjustments that might have resulted had the
ultimate outcome of the uncertainty referred to in the preceding paragraph been
known, I do not express an opinion on the financial statements referred to
above.
January 6, 1999

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Summary of Significant Accounting Policies
This summary of significant accounting policies of U.S. Online, Inc.
(formerly Venture Quest, Inc.) "the Company" is presented to assist in
understanding the Company's financial statements. The financial statements
and notes are representations of the Company's management who is
responsible for their integrity and objectivity.
Nature of Operations
U.S. Online, Inc. (formerly Venture Quest, Inc.) "the Company", was
organized under the laws of New York on July 18, 1989, and is engaged in
the business of providing computer internet access service and point of
sale internet franchise sales to customers primarily in the Eastern Region
of the United States.
Basis of Combination
The combined financial statements include the accounts of U.S. Online,
Inc., a Pennsylvania Corporation and Venture Quest, Inc., a New York
Corporation. All significant intercompany accounts and transactions have
been eliminated in the combination.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided for by the
straight-line and accelerated methods over the estimated useful lives of
the assets. Organization costs are amortized on a straight-line basis over
a period of five years.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due. The Company
had a net loss of $1,310,410 at December 31, 1997 and accordingly no
provision for income taxes is necessary. The Company has loss carry forward
that may be offset against future federal income taxes expiring 2112.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
11

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (con't)
Repairs and Maintenance
Expenditures for repairs, maintenance, and minor renewals are charged
against income as incurred and expenditures for major renewals and
betterments are capitalized and amortized over five years. The cost and
accumulated depreciation of assets sold or retired are removed from the
respective accounts with any gain or loss on disposal reflected in income.
Cash and Cash Equivalents
The Company considers cash equivalents to be those short-term investments
maturing within three months of the balance sheet date.
Loss per Share
The loss per share is based on the weighted average number of shares of
common stock outstanding during the year.
Fair Value of Financial Instruments
The note due from shareholders is based on the terms at which those same
loans would be made currently and approximate their fair value. At December
31, 1997, the carrying value of the assets were $647,682 which equates
their fair value. The carrying value of the capital lease obligations was
$434,196 and are reflective of borrowing rates currently available to the
Company.
Deferred Revenue
Deferred revenue represents prepayment of customer accounts for services to
be rendered. These revenues are amortized over the number of months in the
period.
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Company has a potential concentration of credit risk consisting
primarily of temporary cash deposits and trade accounts receivable.
Concentrations of credit with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across different geographic locations.
NOTE 3- FIXED ASSETS
Major classifications of property and equipment are summarized below:
Dec. 31,1997
--------
Computer equipment and software $666,784
Furniture and Fixtures 41,100
Leasehold improvements 1,435
--------
$709,319
========
12

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - RELATED PARTY TRANSACTIONS
Balance Sheet Items
Long Term Debt
U.S. Online, Inc. had incurred a related party obligation to a company for
expenses paid on the Company's behalf. Such expenses included: payroll,
advertising, rent and other operating expenses advanced since inception. At
December 31, 1996, the net advanced costs were $242,945 and were included
on the balance sheet financial statement as long-term debt related party.
Retirement of Long Term Debt
On April 7, 1997, the Board of Directors voted to exchange $200,000 of long
term debt to a related party for POP (Point of Presence) deposits. The
value of the deposits are estimated at a fair market value established by
the Board of Directors. The deposits are to be converted later to
franchises. Under such agreement, the franchises will be located in the
following territories: Manhattan, NY, Edison, NJ, Eatontown, NJ and
Morristown, NJ.
On August 3, 1997, the Board of Directors voted to exchange the remaining
$40,000 demand note to a related party for POP (Point of Presence)
deposits. The value of the deposits were issued at an estimated discount of
between 28% and 38% established by the Board of Directors. The deposits are
to be converted later to franchises. Under such agreement, the franchises
will be located in the following territories: Nassau County, Long Island
New York, Southern Westhester County, New York and Vineland, New Jersey.
Advances
Related parties had advanced expenses including payroll, advertising, rent,
equipment and other expenses since inception. The amounts outstanding at
December 31, 1996 was $94,416 and were included in the financial statement
as advances from related parties.
Forgiveness of Debt (Advances)
On April 7, 1997, management reached an agreement with the related
companies concerning the advances. The related companies agreed to forgive
the advances in the amount of $97,661 of which $94,416 was listed as
related party advances on the balance sheet at December 31, 1996.
Operating Sub-Lease
The Company maintains a related party obligation on several non cancelable
operating sub-leases from a Company controlled by an executive officer of
the Company and a principle shareholder. The master leases from which the
sub-leases are derived from are guaranteed by the principles of the
affiliated Company. The details of these related party leases are as
follows:
Facility rentals, monthly payments of $2,972, with certain operating
expenses and amortized costs, expiring May 1998.
Telephone system, monthly payments of $361, expiring March 1998.
13

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - RELATED PARTY TRANSACTIONS (cont)
Security system, monthly payments of $355, expiring May 2000.
Computer equipment, monthly payments of $979, on various leases expiring
December 1999.
NOTE 5 - CAPITAL LEASE OBLIGATIONS
The Company has purchased certain computer equipment and furniture under
capital lease obligations expiring through 2001. Accordingly, SFAS 13
requires that the asset be capitalized and depreciated and the related
lease obligations be recorded at the present value of the future minimum
lease payments and interest imputed. Some of the lease obligations are
secured by the corresponding assets, guaranteed by a related party Company
and personal guarantees by the executive officers and a principal
shareholder of the Company. Future minimum lease obligations at December
31, 1997 for capital lease obligations were as follows:

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6 - LEASES
The Company maintains a related party obligation on several non cancelable
operating sub-leases from a Company controlled by an executive officer of
the Company and a principle shareholder. The master leases from which the
sub-leases are derived from are guaranteed by the principles of the
affiliated Company. The details of these related party leases are as
follows:
Facility rentals, monthly payments of $2,972, with certain operating
expenses and amortized costs, expiring May 1998.
Telephone system, monthly payments of $361, expiring March 1998.
Security System, monthly payments of $355, expiring May 2000.
Computer equipment, monthly payments of $979, on various leases expiring
December 1999.
Future minimum rentals under all non cancelable operating leases are as
follows:
Year Ending December 31,
1998 $23,235
1999 15,409
2000 1,225
-------
$39,869
=======
On August 3, 1997, the Board of Directors voted to exchange $60,000 of
related party rents, or five months of payments where the equivalent is
$60,000, for POP (Point of Presence) deposits. The value of the deposits
were issued at an estimated discount of between 28% and 38% as established
by the Board of Directors. The deposits are to be converted later to
franchises. Under such agreement, the franchises will be located in the
following territories: Nassau County, Long Island New York, Southern
Westchester County, New York and Vineland, New Jersey. (See Retirement of
Long Term Debt footnote above)
17

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 7 - AGREEMENT, MERGER AND CORPORATE NAME CHANGE
On May 7, 1997, U.S. Online, Inc., a Pennsylvania Corporation, signed a
merger agreement with Venture Quest, Inc., a New York corporation. One
share of the Company's common stock was exchanged for one share of Venture
Quest, Inc. common stock with Venture Quest, Inc. being the surviving
corporation. The exchange is intended to qualify as a tax-free transaction
under Section 351 of the Internal Revenue Code. Venture Quest, Inc. has
elected to adopt the U.S. Online, Inc. name effective the date of the
merger which was June 26, 1997.
NOTE 8 - OMNIBUS AND SENIOR EMPLOYEE STOCK OPTION PLAN
On December 11, 1997, the Company voted to authorize 10,000,000 shares of
common stock for an employee stock option plan. The term of the plan will
be 10 years. The Company issued 864,000 shares to certain executives of the
Company with various employment restrictions and an exercise price of $.25.
NOTE 9 - EQUITY FINANCING, CAPITAL STOCK AND WARRANT PURCHASE SHARES
On June 19, 1997 the Board of Directors voted for the Company to offer on a
"best efforts basis ", under Regulation A, 133,334 shares of common stock
at a price of $.75 per share. The offering closed with 19,667 shares being
issued and raised $14,750.
On October 29, 1997 the Board of Directors voted for the Company to offer
on a "best efforts basis ", under Regulation A, 400,000 shares of common
stock at a price of $.25 per share. The offering closed with 199,000 shares
being issued and raised $49,750.
On October 29, 1997 the Board of Directors voted for the Company to offer
on a "best efforts basis ", under Regulation A, 2,000,000 shares of common
stock at a price of $.10 per share with a minimum purchase of five thousand
dollars ($5,000) during the third and fourth quarters of 1997. The offering
closed on October 29, 1997 with the maximum shares being issued and raised
$200,000.
On July 18, 1997, the Board of Directors voted to issue to all shareholders
of record as of July 18, 1997 a Class A Common Stock Purchase Warrant with
an exercise price of $2.00 per share and a maturity of two years from
issuance.
On October 31, 1997, the Board of Directors voted to issue to all
shareholders of record a Class B Common Stock Purchase Warrant, whereby the
shareholder of record could exercise the warrant shares at an exercise
price of four dollars ($4.00) per share on a one for one basis and a
maturity of one year from date of issuance.
18

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10 - NONMONETARY TRANSACTION
Capital lease obligations were incurred for the purchase of equipment in the
amount of $428,640.
NOTE 11 - FRANCHISE
The Company intends to sell Point of Presence territorial rights and
equipment under franchising arrangements. These rights granted under the
franchise will allow the franchise to exclusively market services provided
by the Company throughout a particular geographic region.
NOTE 12 - RETIREMENT OF LONG-TERM DEBT AND NONMONETARY TRANSACTIONS
On April 7, 1997 and August 3, 1997 respectively, the Board of Directors
voted to exchange $242,000 of long term debt to a related party for POP
(Point of Presence) deposits. The value of the April 7, 1997 deposits are
at a fair market value and the August 3, 1997 deposits were issued at a
discount as established by the Board of Directors.
NOTE 13 - FOREGIVENESS OF DEBT AND NONMONETARY TRANSACTIONS
On April 7, 1997 and August 3, 1997 respectively, the Company reached an
agreement with the related companies concerning outstanding debt. The
related companies agreed to forgive debt in the following amounts which are
listed as related party advances on the balance sheet at December 31, 1996.
19

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 14 - COMBINED FINANCIAL STATEMENTS
Included in the financial statements at December 31, 1997 is the following
proforma balance sheet and income statement activity of Venture Quest, Inc,
the former development stage company.

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 15 - FRANCHISE DEPOSITS
The Company has received certain deposits in the amount of $344,500 which
is reflected as franchise deposit liabilities at December 31, 1997. Upon
completion of the Uniform Franchise Offering Circular and the specific
performance and obligations of the Company to install these franchise
points-of-presence (POP) the Company will recognize such amounts as
revenue.
NOTE 16 - REALIZATION OF ASSETS AND GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a
net loss of $1,310,142 during the year ended December 31, 1997, and as of
that date, the Company's current liabilities exceeded its current assets by
$1,319,853 and its total liabilities exceeded its total assets by
$1,036,621. These factors create an uncertainty as to the Company's ability
to continue as a going concern. The Company has developed a plan to reduce
its liabilities through the sale of assets (POP franchises) and/or a
possible third party financing. The ability of the Company to continue as a
going concern is dependent upon the success of the plan. The financial
statements do not include any adjustments that might be necessary should
the Company be unable to continue as a going concern.
NOTE 17 - COMMITMENTS
On June 5, 1997 the Board of Directors agreed to issue 50,000 shares of
common stock to the Company's internal legal council in exchange for
services.
On February 4, 1997 the Board of Directors agreed to issue 3,333 shares of
common stock to the Company's franchise legal council in exchange for
services.
On December 11, 1997, the Company voted to issue the Company's Principal
Executive Officer 500,000 shares under the Senior Stock Option Plan and a
maximum compensation package of $125,000 annually inclusive of the stock
options. In addition, this employment contract would require certain
performance results.
NOTE 18 - SUBSEQUENT EVENTS
Issuance of Convertible Subordinated Debentures.
The Board of Directors voted on September 16, 1997 to issue and register
with the securities and exchange commission under Regulation A, 300,000
shares of 9% subordinated convertible debentures with a floating exercise
price at a 20% discount to the average closing bid price 15 days prior to
conversion and a five year maturity. Under the Securities Purchase
Agreement dated May 6, 1998, the Company raised $300,000 by issuing these
subordinated debentures and entered into an Intercreditor Agreement with
the Note Holders.
21

U.S. ONLINE, INC.
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
Bankruptcy Filings (Chapter 11)
On August 25, 1998 the Company filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United states Bankruptcy
Court for the District of New Jersey. At the time of the filing, the
Company represented that the going concern of the business exceeded its
liquidation value.
Sale of Assets under Chapter 11
On or about October 23, 1998, the Company and the United States Bankruptcy
Court entered into an agreement with a competitor to sell substantially all
of its corporate assets for $566,000, including $161,000 paid to satisfy
certain executory contracts, eleven point of presence locations and all
equipment located at the Mount Laurel headquarters of the Company.
Litigation and Objections to Motions under Chapter 11 protection
Certain motions of protest were filed against the Company and its
principles for the sale of the Company's assets. In addition, an injunctive
relief and compensatory and punitive damages attributable to breach of
common law fiduciary duties as shareholders and other improper actions are
being sought by certain Point of Presence owners.
Bankruptcy Motion of Conversion from Chapter 11 to Chapter 7.
On December 21, 1998, the United States Trustee motioned to convert the
Chapter 11 petition to Chapter 7 liquidation proceedings. A United States
Trustee was appointed to liquidate the affairs of the Company based on the
debtors inability to: provide certain required documentation and schedules,
to effectuate a plan of reorganization, to pay quarterly fees due to the
United States Trustee and other supporting facts as stated in the December
21,1998 Motion.
22

Report of Independent Certified Public Accountants
Board of Directors and Stockholders
U.S. Online, Inc.
Mt. Laurel, New Jersey
I have audited the accompanying balance sheet of U.S. Online, Inc. as of
December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U.S. Online, Inc. as of
December 31, 1996, and the results of its operations, stockholders' equity and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
JOSEPH J. REPKO, CPA
February 8, 1997

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
U.S. Online,Inc. "the Company", a Pennsylvania Corporation, is engaged in
the business of providing computer internet access service and point of
sale internet franchise sales to customers primarily in the Eastern Region
of the United States.
On October 17, 1996 the Company issued an aggregate of 5,800,000 shares of
restricted common stock to its shareholders in a 5,800 to 1 stock split.
During 1996, the Company offered to private investors through a private
offering a total of 600,000 shares at an offering price of $.75 per share.
The maximum offering would raise the company $450,000, the minimum would
raise $300,000. At December 31, 1996, the Company obtained its maximum
offering.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided for by the
straight-line and accelerated methods over the estimated useful lives of
the assets.
Income Taxes
The company elected to be taxed as a Subchapter "S" Corporation for both
federal and state tax purposes. Accordingly, the company's results of
operations are reflected in the shareholder's individual tax returns"
therefore, no tax provision has been reflected in the accompanying
financial statements. On December 22, 1996, the company terminated its
Subchapter "S" election due to the addition of a corporate shareholder.
The company filed a regular corporate return for the short period December
22, to December 31, 1996. No provision for taxes has been reflected on the
accompanying financial statement due to a net loss for the short period.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
6

U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (Con't)
Repairs and Maintenance
Expenditures for repairs, maintenance, and minor renewals are charged
against income as incurred and expenditures for major renewals and
betterments are capitalized and amortized over five years. The cost and
accumulated depreciation of assets sold or retired are removed from the
respective accounts with any gain or loss on disposal reflected in income.
Cash and Cash Equivalents
The Company considers cash equivalents to be those short-term investments
maturing within three months of the balance sheet date.
Loss per Share
The loss per share is based on the weighted average number of shares of
common stock outstanding during the year. The effect of the stock split of
5,800 to 1 has been considered in this calculation.
Fair Value of Financial Instruments
The note due from shareholders is based on the terms at which those same
loans would be made currently and approximate their fair value. At December
31, 1996, the carrying value of the assets were $720,313 which equates
their fair value. The carrying value of the capital lease obligations was
$92,264, the related party long-term note was $242,945, and the related
party advances were $94,416 and are reflective of borrowing rates currently
available to the Company.
NOTE 2 - CONCENTRATION OF CREDIT RISK
The Company has a potential concentration of credit risk consisting
primarily of temporary cash deposits and trade accounts receivable.
Concentrations of credit with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across different geographic locations. At December 31,
1996, the Company held $459,336 in one bank account which is in excess of
the federal deposit insurance company limit of $100,000 creating a
potential concentration of credit risk of $359,336.
7

U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 3- FIXED ASSETS
Major classifications of property and equipment are summarized below:
1996
----
Computer equipment and software $164,418
Furniture and Fixtures 15,715
Leasehold improvements 1,435
--------
$181,568
--------
At December 31, 1996 the Company agreed to assume title of assets under
capital leases previously leased by a related party. The equipment was
physically in operation by the Company and payments were made by the
Company directly to the third party lessors.
NOTE 4 - RELATED PARTY TRANSACTIONS
Balance Sheet Items
Notes Payable
U.S. Online, Inc. has incurred a related party obligation to two companies
for expenses paid on the Company's behalf. Such expenses included: payroll,
advertising, rent and other operating expenses advanced since inception. As
of December 31, 1996, the net advanced costs were $242,945. The note bears
interest at 9% annually and is payable in monthly installments of $5,043
beginning March 15, 1997. Interest on the related party debt was $10,932 at
December 31, 1996.
Annual maturities are as follows:
1997 $ 33,320
1998 43,413
1999 47,486
2000 51,940
2001 56,812
2002 9,974
--------
$242,945
--------
8

U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Advances
Related parties had advanced expenses including payroll, advertising, rent,
equipment and other expenses since inception. The amounts outstanding at
December 31, 1996 was $94,416.
Operating Sub-Lease
The Company maintains a related party obligation on several non-cancelable
operating sub-leases from a Company controlled by an executive officer of
the Company and a principle shareholder. The master leases from which the
sub-leases are derived from are guaranteed by the principles of the
affiliated Company. The details of these related party leases are as
follows:
Facility rentals, monthly payments of $2,972, with certain operating
expenses and amortized costs, expiring May 1998.
Telephone system, monthly payments of $361, expiring March 1998. Security
System, monthly payments of $355, expiring May 2000. Computer equipment,
monthly payments of $979, on various leases expiring December 1999.
NOTE 5 - CAPITAL LEASE OBLIGATIONS
The Company has purchased certain computer equipment and furniture under
capital lease obligations expiring through 2001. Accordingly, SFAS 13
requires that the asset be capitalized and depreciated and the related
lease obligations be recorded at the present value of the future minimum
lease payments and interest imputed. The lease obligations are secured by
the corresponding assets, guaranteed by a related party Company and
personal guarantees by the executive officers and a principal shareholder
of the Company. Future minimum lease obligations at December 31, 1996 for
capital lease obligations were as follows:
9

U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Facility rentals, monthly payments of $2,972, with certain operating
expenses and amortized costs, expiring May 1998.
Telephone system, monthly payments of $361, expiring March 1998. Security
System, monthly payments of $355, expiring May 2000. Computer equipment,
monthly payments of $979, on various leases expiring December 1999.
Future minimum rentals under all non-cancelable operating leases are as
follows:
Year Ending December 31,
1997 $ 35,085
1998 23,235
1999 15,409
2000 1,225
--------
$ 74,954
NOTE 7 - PROPOSED MERGER
On December 2, 1996 the Company signed a letter of intent to merge with
Venture Quest, Inc., a New York corporation. One share of the Company's
common stock will be exchanged for one share of Venture Quest, Inc. common
stock with Venture Quest, Inc. being the surviving corporation. The
exchange is intended to qualify as a tax-free transaction under Section 351
of the Internal Revenue Code.
NOTE 8 - NOTES PAYABLE
Notes Payable
U.S. Online, Inc. has incurred a related party obligation to two companies
for expenses paid on the Company's behalf. Such expenses included: payroll,
advertising, rent and other operating expenses advanced since inception. As
of December 31, 1996, the net advanced costs were $242,945. The note bears
interest at 9% annually and is payable in monthly installments of $5,043
beginning March 15, 1997. Interest on the related party debt was $10,932 at
December 31, 1996.
11

U.S. ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 8 - NOTES PAYABLE (con't)
Annual maturities are as follows-.
1997 $33,320
1998 43,413
1999 47,486
2000 51,940
2001 56,812
2002 9,974
--------
$242,945
NOTE 9 - NONMONETARY TRANSACTION
Capital lease obligations were incurred for the purchase of equipment in
the amount of $104,512.
Related parties contributed equipment in the amount of $48,312 along with
the payment of Company expenses in the amount of $346,390. The equipment
has been recorded in the accompanying balance sheet at its fair market
value on the date of the transfer.
NOTE 10 - FRANCHISE
The Company intends to sell Point of Presence territorial rights and
equipment under franchising arrangements. These rights granted under the
franchise will allow the franchise to exclusively market services provided
by the Company throughout a particular geographic region.
12

Report of Independent Certified Public Accountants
On Supplementary Information
Officers and Directors
U.S Online, Inc.
Mount Laurel, NJ
My audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole of U.S. Online, Inc. for the year ended
December 31, 1996, which is presented in the preceding section of this report.
The supplementary information presented hereinafter is presented for purposes of
additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the audit procedures applied
in the audit of the basic financial statements and, in my opinion, is fairly
stated, in all material respects, in relation to the basic financial statements
taken as a whole.
JOSEPH J. REPKO, CPA
February 8, 1997

Webspan, Inc.
Notes to Financial Statements
December 31, 1997 and 1996
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
The Company is a corporation organized on January 5, 1996 under the laws of
the state of New Jersey for the purpose of serving as an internet web host.
NOTE 2 - EQUIPMENT AND DEPRECIATION
Equipment is stated at cost and equipment leases are all capitalized.
Depreciation is computed over a period of five (5) years using the
double-declining balance method. All equipment is subject to an U. C. C.
security interest.
NOTE 3 - EQUIPMENT LEASE PAYABLE
Equipment lease payable represents the balance of lease payments due on the
capitalized leases included in note 2.
NOTE 4 - NOTES PAYABLE/DEFERRED INTEREST
Net server equipment in the amount of $112,425 was purchased from U. S.
Robotics. Note payments of $7,118 are to be made monthly for 24 months of which
$58,419 represents deferred interest. The equipment is subject to an U. C. C.
filing.
NOTE 5 - DEFERRED INCOME-REVENUE RECOGNITION
Deferred income applies to prepaid customer subscriptions, which if
cancelled at the customer's discretion under each of the respective plans, would
be non-forfeitable. Consequently, income will be recognizable at the point that
payments are forfeitable.
NOTE 6 - SUBSEQUENT EVENTS
On January 5, 1998 CPHP, a secured creditor of Webspan, Inc., enforced a
security interest against Webspan, Inc. due to its default of an agreement dated
December 10, 1995. The U. C. C. security interest was applicable to much of the
equipment, equipment leases and to the entire customer list. This effectively
terminated Webspan Inc.'s status as a going concern. CPHP subsequently
transferred all the acquired assets to Webspan Communications, Inc. subject to a
new U. C. C. interest on the equipment and customer list in exchange for its
stock.
Page 6

We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must not
rely on any unauthorized information or representations. This prospectus does
not offer to sell or buy any shares in any jurisdiction where it is unlawful.
The information in this prospectus is current only as of its date.
-----------------

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
SEC registration ......................................... $ 2,134.51
Printing and engraving costs ............................. 2,000.00
Legal fees and expenses .................................. 25,000.00
Accounting fees and expenses ............................. 15,000.00
Miscellaneous ............................................ $ 5,865.49
----------
Total ............................................ $50,000.00
==========
- ----------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") contains
the provisions entitling the Registrant's directors and officers to
indemnification from judgments, fines, amounts paid in settlement, and
reasonable expenses (including attorney's fees) as the result of an action or
proceeding in which they may be involved by reason of having been a director or
officer of the Registrant. In its Certificate of Incorporation, the Registrant
has included a provision that limits, to the fullest extent now or hereafter
permitted by the DGCL, the personal liability of its directors to the Registrant
or its stockholders for monetary damages arising from a breach of their
fiduciary duties as directors. Under the DGCL as currently in effect, this
provision limits a director's liability except where such director (i) breaches
his duty of loyalty to the Registrant or its stockholders, (ii) fails to act in
good faith or engages in intentional misconduct or a knowing violation of law,
(iii) authorizes payment of an unlawful dividend or stock purchase or redemption
as provided in Section 174 of the DGCL, or (iv) obtains an improper personal
benefit. This provision does not prevent the Registrant or its stockholders from
seeking equitable remedies, such as injunctive relief or rescission. If
equitable remedies are found not to be available to stockholders in any
particular case, stockholders may not have any effective remedy against actions
taken by directors that constitute negligence or gross negligence.
The Certificate of Incorporation also includes provisions to the effect
that (subject to certain exceptions) the Registrant shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such indemnification and advancement of expenses is permitted under
such law, as may from time to time be in effect. In addition, the By-Laws
require the Registrant to indemnify, to the full extent permitted by law, any
director, officer, employee or agent of the Registrant for acts which such
person reasonably believes are not in violation of the Registrant's corporate
purposes as set forth in the Certificate of Incorporation. At present, the DGCL
provides that, in order to be entitled to indemnification, an individual must
have acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the Registrant's best interests.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Registrant has been advised that in the opinion of the
Securities and
II-1

Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable.
Item 15. Recent Sales of Unregistered Securities.
During the past three years, the Company sold the following unregistered
securities:
In February 1997, the Company issued an aggregate of 1,168,000 shares of
Common Stock for consideration of $.01 per share to the following persons: Nicko
Feinberg, Michael Char, Stephen J. Cole-Hatchard, Stephen Cole-Hatchard Family
Limited Partnership, Michael Olbermann, Vestrco, Inc., Nino Fontana, Michael
Garvey, Jeffrey Cohen, Edward Anderson, Peter Morris and Jay Edward & Partners,
Ltd.
In February 1997, the Company issued options to purchase an aggregate of
165,600 shares of Common Stock (net of forfeitures) to: Michael Garvey, Jeffrey
Cohen, Sharon Baker, Ron Signore, Chris Ann Stolecki and Jennifer Brodil.
Options issued to Ms. Baker and Mr. Signore were issued in consideration of
consulting services.
In May 1997, the Company issued an aggregate of 160,000 shares of Common
Stock for consideration of $2.00 per share to the following persons: Allen
Markowitz, William A. Barron, The Rough Group, Robert E. Sullivan and Virginia
M. Sullivan, Richard Baker, William E. Stolecki and James W. Stolecki, Doris
Cole- Hatchard, Patrick Keenan, Douglas J. Cole-Hatchard Jr., James P. Quinn and
Deborah A. Quinn, William J. Collins, Lewis L. Prince, Michael J. Dooling,
Maureen T. Donoghue, Geraldine Garvey, Edwin Kahn and Wilma R. Kahn, Bruce G.
Tracy, Elizabeth M. Dooling, FKF Holding Company, L.P.
In December 1997, the Company issued 100,000 shares of Common Stock and
options to purchase 80,000 shares to Ronald Shapss. The securities issued to Mr.
Shapss were issued in consideration of consulting services. In addition, 300,000
warrants were issued to Edward Anderson (40,000), Doris Cole-Hatchard (64,000)
and The Rough Group (196,000) in connection with a private placement.
In October 1998, we issued 10 shares of series A convertible preferred
stock to the stockholders of WOWFactor, Inc. in connection with our acquisition
of all of the outstanding common stock of WOWFactor, Inc. The series A preferred
stock is convertible on July 15, 1999 into a maximum of 250,000 shares of our
common stock.
In December 1998, we issued 113,364 shares of our common stock to the
stockholders of Webspan, Inc. in connection with our acquisition of
substantially all of the assets of Webspan, Inc.
In March 1999, we issued 158,856 shares of our common stock and warrants to
purchase 21,662 shares of our common stock to two investors in a private
transaction for aggregate consideration of $2,000,000.
Each of the above investors had full access to information relating to the
Company and represented to the Company that he or she had the required
investment intent. Each of the above investors was sophisticated in that he or
she had such knowledge and experience in financial and business matters that he
or she is capable of evaluating the merits and risks of the investment. In
addition, the above-referenced securities will bear appropriate restrictive
legends, and stop transfer orders will be placed against such securities.
In connection with the above referenced issuances, the Company relied on
Section 4(2) under the Securities Act of 1933 as transactions by an issuer not
involving any public offering.
II-2

Item 16. Exhibits
3.1 Certificate of Incorporation of the Company.+
3.2 By-Laws of the Company.+
4.1 Certificate of Designation of Series A Preferred Stock.++
5.1 Opinion of Tenzer Greenblatt LLP as to the legality of the securities
being registered.*
10.1 Employment Agreements with Messrs. Cole-Hatchard, Feinberg and
Olbermann.+
10.2 Employment Agreement with Ms. Margaret McGillin.++
10.3 Stock Purchase Agreement dated as of October 1, 1998 by and among the
Company, WOWFactor, Inc. and the WOWFactor stockholders.++
10.4 Form of Registration Rights Agreement among the Company and the
WOWFactor stockholders.++
10.5 Asset Purchase Agreement dated as of October 9, 1998 by and between
the Company and Roxy Systems, Inc. d/b/a Magic Carpet.++
10.6 Letter Offer to Purchase Substantially all of the Assets of US Online,
Inc.+++
10.7 Asset Purchase Agreement dated as of November 24, 1998 by and among
the Company, Webspan, and the sole stockholder of Webspan.++++
10.8 Amendment to Asset Purchase Agreement dated December 17, 1998 by and
among the Company, Webspan, and the sole stockholder of Webspan.++++
10.9 Form of Registration Rights Agreement among the Company and the sole
stockholder of Webspan.++++
10.10 1997 Stock Option Plan of the Company.+
10.11 Stock Purchase Agreement dated March 25, 1999, with Exhibit A+++++
10.12 Registration Rights Agreement dated March 25, 1999, with Exhibit
A+++++
23.1 Subsidiaries
23.2 Consent of BDO Seidman, LLP
23.3 Consent of Joseph J. Repko, CPA
23.4 Consent of Steven H. Mermelstein, CPA
- ------------
* To be filed by amendment.
+ Incorporated by reference to the applicable exhibit contained in the
Company's Registration Statement on Form SB-2 (file no. 333-34115).
II-3

++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated October 9, 1998.
+++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated October 23, 1998.
++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated December 17, 1998.
+++++ Incorporated by reference to the applicable exhibit contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1998.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act; and
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 and Section 15(d) of the Exchange Act that are incorporated by
reference in the registration statement.
(2) That, for purposes of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall be
deemed to be a new registration
II-4

statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5

SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, in the City of Pearl River, State of New York, on April 28, 1999.
FRONTLINE COMMUNICATIONS CORPORATION
By: /s/ Stephen J. Cole-Hatchard
---------------------------------------------
Stephen J. Cole-Hatchard, Chief Executive Officer
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Stephen J. Cole-Hatchard, as his true and lawful
attorney-in-fact and agent, with full power of substitution for him and in his
name, place and stead, in any and all capacities (until revoked in writing) to
sign any and all amendments (including post-effective amendments and amendments
thereto) to this Registration Statement on Form SB-2 of Frontline Communications
Corporation and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated March 12, 1999, except
for Note 13 which is as of March 26, 1999, relating to the consolidated
financial statements of Frontline Communications Corporation as of December 31,
1998 and for the two years then ended as well as our report dated December 18,
1998 relating to the financial statements of WOWFactor, Inc. as of December 31,
1997 and for the two years then ended and our report dated December 22, 1998
relating to the financial statements of Roxy Systems, Inc., as of December 31,
1997 and for the year then ended.
We also consent to the reference to us under the caption "Experts" in the
prospectus.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
New York, New York
April 30, 1999

JOSEPH J. REPKO
Certified Public Accountant
453 N. State Road
Springfield, PA 19064
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
I hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of my report dated February 8, 1997,
relating to the financial statements of U.S. Online, Inc. as of December 31,
1996 and for the one year then ended and my report dated January 6, 1999
relating to the financial statements of U.S. Online, Inc. as of December 31,
1997 and for the one year then ended.
/s/ Joseph J. Repko CPA
-----------------------
Joseph J. Repko, CPA
April 28, 1999

STEVEN H. MERMELSTEIN
Certified Public Accountant
2523 Avenue P
Brooklyn, NY 11229
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
I hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of my report dated February 8, 1999,
relating to the consolidated financial statements of Webspan, Inc. as of
December 31, 1996 and 1997 and for the two years then ended.
I also consent to the reference to me under the caption "Experts" in the
prospectus.
/s/ Steven H. Mermelstein
-------------------------
Steven H. Mermelstein, CPA
Brooklyn, New York
April 30, 1999